Building your retirement nest egg can be a stressful balancing act. On one hand, you need your portfolio's growth to be aggressive enough so you have enough to retire when you choose. On the other hand, the fastest-growing investments are generally the riskiest, and you don't want to be left destitute by an unexpected market tumble. No single mix of investments is right for everyone. What defines "balanced" for you depends on a number of factors, including your age and your tolerance for losing some of that hard-earned cash.
1. Adjust your portfolio holdings based on your age and your current assets. The classic balanced portfolio model suggests putting 60 percent of your savings in stocks, 30 percent in bonds and holding 10 percent in cash. If you're younger, you can push your stock holdings a little higher. The same advice goes if you have a large existing portfolio. On the other hand, people age 50 and over should scale back their stock holdings to about 50 percent, since they have less room for loss as they near retirement.
2. Calculate your expected sources of retirement income, other than what you'll get from your investments. Knowing this number helps you determine how much you'll need to lean on personal savings during your golden years. If it turns out you need high growth to get the standard of living you want, you may find yourself more tolerant of investment risk. Add up the value of your pension, your home, Social Security payments and anticipated part-time income.
3. Calculate your anticipated retirement allowance, based on the growth you can expect from your holdings. If you're not sure how to calculate what stocks, mutual funds and other non-fixed income investments will earn, use past growth reports to arrive at accurate estimates. Add your savings to your other expected retirement income sources, then divide by the number of years you expect to be retired.
4. Reallocate your portfolio funds based on your risk tolerance. If the annual allowance you calculated doesn't look like enough for you, you have two options: invest more aggressively, shifting more of your savings to stocks, or save a higher percentage of your income each year. A third option, of course, would be a combination of these strategies. If you're mid-career and wary of stocks, you can get away with holding only 50 percent of your portfolio in stock if you put more of your paycheck into savings -- 20 to 30 percent, depending on your income and savings goals.
5. Invest your money wisely by choosing relatively low-risk forms of each investment type for your portfolio. To mitigate risk from holding bonds, stick with investments with maturities of three years or less, and choose reliable bonds unlikely to default, such as U.S. Treasuries or reputable corporate bonds. Pick stocks that pay out dividends, since these investments tend to be less volatile.
6. Evaluate your retirement portfolio's fund distribution at least once annually, and make adjustments as you age or as your goals change. Scale back your stock holdings as you near retirement, and consider using a portion of your savings to buy a life annuity, which will guarantee you a specific income for the rest of your retirement years.
- Targeted maturity funds determine a mix of investments for you based on your income and target retirement date. If you choose to invest in one, don't just buy and forget. Some of these funds go against conventional retirement savings wisdom, lowering your stock holdings to 20 percent in later years. In an article for MSN Money, writer Liz Pulliam Weston says that experts generally recommend keeping 50 percent of your savings in stocks, even as you get older.
- Online portfolio calculators simplify the process of figuring out where you should put your savings.
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