Most of us want to retire in comfort. A successful retirement doesn’t just happen, though. You need to set money aside for your retirement, saving up over time so that you don’t run out of money.
One of the most efficient and effective ways to save for retirement is through investing. Here are 4 tips for building a better retirement portfolio:
1. Identify Your Retirement Goals
Your first step is to identify your retirement goals. What do you want your money to accomplish? When figuring out the money needed for retirement, you first need to know what you will be doing.
Think about what you want to have happen in retirement. How much money you need depends on whether you plan to downsize, take up a new hobby, or travel. Consider what you want to do, and figure out how much money that will require. Once you have identified your retirement goals, you can make a plan and stick to it.
2. Choose an Appropriate Asset Allocation
Asset allocation matters when building your retirement portfolio. Early on, you want more aggressive investments that are more likely to help your account grow. Younger contributors can afford mistakes early on, and stocks are often desirable.
However, this doesn’t mean that you stick with the same asset allocation forever. You need to periodically rebalance to keep your portfolio in line with your ultimate retirement goals. And, as you approach retirement, you need to shift into less risky assets that are more likely to preserve your capital.
Remember diversity is an important part of asset allocation as well.
3. Contribute Consistently
Along with asset allocation, consistent contribution is essential to building a better retirement portfolio. Even if you can’t put in a huge lump sum, you can still take advantage of compounding returns over time as you make regular contributions to your account.
Once you get in the habit of contributing, you’ll be surprised at how much your account can grow. Just make sure that you increase your contributions as your income increases.
4. Tax Planning
Don’t forget the tax planning aspects of your retirement portfolio. Think about the situation, and what you feel is most likely to happen in the future.
Do you think that taxes will go up? If so, put money in a Roth account so that you are paying taxes now, at a lower rate. Later, when it’s time to withdraw, you won’t have to pay taxes on your earnings.
If you think taxes will be lower for you in the future (maybe you’ll move down a tax bracket or two), a traditional account, with a tax deduction now, can give you good value for your investing dollar, and help your portfolio.
Also think about the types of assets you can keep in each type of retirement account. If you have municipal bonds, it doesn’t make sense to keep them in your tax-advantaged retirement account because munis are already tax-efficient. Other investments, though, like P2P loans and stocks can be great in a tax-advantaged account (especially a Roth) so that you don’t have to worry about paying taxes on the earnings immediately.
Carefully consider your options, and consult a professional who can help you build a better investment portfolio.