First off: Of course, there is more than one way to build your retirement pension portfolio. It always depends on what exactly your investment goals are for early retirement and how much time you have to accumulate wealth. Anyway, here are five steps you can follow if you want to have a very solid retirement portfolio.
Stay away from risk stocks
A recipe for potentially devastating effects on old-age investments: a retirement pension portfolio brimming with high-risk stocks. Even if you currently have only a handful of such stocks, you should think about selling them. Volatility is a lot easier if you are still a long way from retirement. If one or the other smears off, you just have to wait for the recovery period to come, or if it’s worse, you’ll have plenty of time left to make new money.
There are a number of stocks that are too risky for us. Including stocks where you can not fully understand the business model of the companies, where the competitive advantage is not clear, or where the stock is simply overvalued.
Bring on the dividend shares
What kind of shares should you hold then? Of course, especially beautiful are those who pay you a regular income. Below that, dividend stocks are very popular, but you have to choose well as there are many. Look for healthy and growing companies those with little or no debt at all, those with competitive advantages like strong brands or high entry barriers for competitors, and plenty of room to grow, and focus on both the dividend growth rate and the dividend itself.
Because sometimes a dividend of 2% is preferable to 3% or 4% if you find that you increase it at a much faster rate. In a few years, it could already make more money than the others and even higher dividends. Find one with a low payout ratio, let’s say 75% or below. The ratio shows you how much of the revenue is distributed. If the number is too high, then the company has not much opportunities in difficult times, which may mean that the payment must eventually be reduced.
Preference stocks typically offer above-average dividends while below-average declines – which sounds like a good choice for retired investors. You can put together an entire retirement pension portfolio of preferred stock from one or more preferred stock funds.
Real estate funds, which encompass a wide range of real estate types, including commercial and residential buildings, apartments, industrial, hospitals and department stores, are another sensible choice for a so-called “model portfolio”. They provide access to the real estate industry without having to invest directly in real estate, which would then have to be rented and renovated, and which from time to time may be difficult to dispose of. There are ETFs that specialize in real estate funds.
Spread assets reasonably
The best retirement pension portfolios will be reasonably diversified, that is, they will be spread across many categories, including stocks, treasury bills, cash. One rule: The younger you are, the larger the proportion of your investment in equities should be, as the stock market is growing faster than other forms of investment. As you grow older, it makes sense to invest more and more in bonds that grow more slowly but offer more stability. It’s also a good thing to have a little cash in case of an emergency – or to take advantage of opportunities quickly, such as a stock that has fallen or an entire market that has lost value.
A model for retirees: the bulk of bonds, which share they take, your risk appetite will tell you, with a good shot of stocks. Even at the age of 70, you can easily and still have 20 more years left, so your portfolio can grow well even then.
You are welcome to add a few growth stocks as well. While you should be cautious about unknown companies, there is nothing wrong with taking a closer look at large companies that still have plenty of room to grow. Such as: Apple, Google, Amazon, Starbucks and Celgene. But only buy if the stock is undervalued in your opinion. You also need to be aware that you need to keep up with the developments, so you can react quickly should the weather be rougher.
Also, effective: a series of slow-growing blue chips, including Johnson & Johnson, General Motors and General Electric. But wait here for interesting entry opportunities before you strike. Also, be aware that many of them are very attractive dividend payers, which is even more enjoyable for you.
Why not even pension insurance?
It is nice if you can reduce the pressure a little with age. This is particularly possible with a pension insurance. If you bring one or two into the portfolio, you can count on regular payments, without having to track share prices all the time.
Concentrate on fixed insurance, no variables. Fixed insurances offer a fixed payout which is often raised with rising inflation. With an investment of $200,000, a 70-year-old couple can count on a monthly payout of $1,000, as long as at least one of them stays alive. Someone who is 65 years old and invests $100,000, could cash in $1,200 per month, month after month, starting with his 75th birthday. It might just be a good way for you to assure not to end up without cash in your pockets one day.
Always have a safety net
Ultimately, you always need a safety net in your portfolio. The previous steps are already designed to avoid risky stocks and keep cash for flexibility. Anyway, almost everyone comes into the situation, where he has to put money in renovations or repairs, or suddenly something unexpected suddenly demands money.
Investing in stocks as soon as they look like a bargain to you is also a form of hedge. One or two annuity policies – ideally from different high-level providers – also provide security by providing quasi-guaranteed income.
Although best planning can not save you from the fact: that in life just now and then something unexpected can always happen. But whatever hits you, you can and always should be prepared for it.
Maybe the next billion dollar revolution is already here
Tesla founder Elon Musk has huge plans for another company, which he expects in his words to build factories that are “an order of magnitude larger than the largest factory existing in the world today.” Investors around the world have already been getting rich with Tesla.
Could this other revolutionary company now be your ticket to wealth? It’s important never to let the hype completely sway you – but research is key. Find and dissect every opportunity, ask around, and share your thoughts on building a retirement pension portfolio.
What are your thoughts on this particular subject and do you have other recommendation that you would like to share with the frugalist F.I.R.E. movement community in the comment box below?