How to Choose a Retirement Portfolio

Most people work for decades. Then, one day, they stop. But they’ll still need money to live on. That’s where a retirement investment portfolio comes in.

What is a retirement portfolio?

A retirement portfolio is a mix of financial assets designed to help individuals save and invest for the future. It's also built to accommodate a shift from saving to spending once the investor retires. 

The assets in the portfolio—typically a mix of stocks, bonds, cash, and others—are earmarked for the years after retirement and intended to cover everyday living expenses. A retirement portfolio can include:

• Stocks
• Bonds
• Savings accounts
• Index funds
• Exchange-traded funds

  (ETFs) and mutual funds

• Real estate
• Cash reserves

Depending on the investing strategy, the blend of assets held in a retirement portfolio may look different earlier in one’s retirement-saving efforts than later on. The asset allocation is also likely to shift in the years preceding and following retirement. 

Types of retirement portfolios

There are three primary types of retirement portfolios an investor may choose from. The choice may depend, in part, on the individual’s career status, years remaining until retirement, and money saved thus far. 

• Growth portfolio.

  This type of portfolio is geared toward building longer-term value during the working years, since income from the portfolio isn’t necessary just yet. Growth investment portfolios often contain a higher proportion of riskier asset classes, such as stocks. There’s even room for so-called alternative investments, which might include everything from funds that invest in farmland to private equity. A growth portfolio is better suited for younger investors with a higher risk tolerance (or ability to withstand market fluctuations and losses) when retirement is still years or decades away.

• Balanced portfolio.

  These portfolios are weighted to achieve modest growth while beginning to transition into more conservative asset classes, such as bonds. A slightly more aggressive portfolio might contain 60% stocks and 40% bonds, while a more conservative one might hold 40% stocks and 60% bonds. A balanced portfolio places a higher priority on protecting against market volatility. Balanced portfolios are intended for those in middle age.

• Income portfolio.

  This portfolio is typically weighted toward stable investments such as bonds when aggressive growth is no longer the goal. Its allocation can provide the investor with long-term income throughout the retirement years, either by providing quarterly dividend distributions or by drawing down principal by withdrawing cash or selling securities.

When to start a retirement portfolio

One of the biggest factors in portfolio growth is time. The sooner an investor starts a retirement portfolio and begins saving, the longer their money has to grow and compound. Waiting too long to begin saving can mean significant loss of growth.

All other factors equal, an investor who starts saving for retirement at age 25 will be able to grow their portfolio faster (and greater) than someone who starts saving at age 35, even if they both contribute the same amount between then and retirement. That’s because their money will have a chance to compound, or grow upon itself. 

For example, money in a savings account will acquire compound interest, or interest on top of interest. The interest that the account earns will be added to the principal balance of the account, which is then used to calculate future interest charges.

Dividend reinvestment

can accomplish the same goal. These extra quarterly payouts can be used to purchase new shares of stock, helping to grow the portfolio’s value as well as its number of shares (and, in turn, increase its future potential earnings).

While there are still many ways to start saving for retirement later in life—well into one’s 40s and 50s, in fact—future retirees will ideally begin saving early and consistently.

Things to consider when building a retirement portfolio

There are a few things investors may want to consider when choosing retirement funds for their portfolio or deciding between different retirement investment strategies.

1. How much income do you want to have in retirement?

A healthy portfolio can provide a retiree with many years of income, however, it does take planning to be successful. Withdrawing too much from a portfolio, for instance, can result in accounts being depleted prematurely. 

Figuring out how much a retirement portfolio should generate annually will determine how much to save in the first place. In general, retirement planners say retirees will need an income equal to about 80% of what they made while working. 

This retirement income can consist of many different sources. It could include everything from government benefits to a pension, annuity payments, passive investment income (dividends, rental property income, etc.), or the sale and withdrawal of securities held in an income-based retirement portfolio.

2. When do you want to retire?

The average American man retires around age 63 while women retire around age 61 on average. Meanwhile, the average life expectancy in the US is just under 79 years, meaning typical retirees need their savings to last nearly two decades. Retire early—or live to 85, 90, or beyond—and that portfolio must provide income for longer. Investors can consider when they want to retire when devising their portfolio strategy, especially if early retirement is part of the plan.

3. What is your risk tolerance?

The level of risk that an investor is willing to take on is called risk tolerance. This tolerance tends to shift over time depending on an investor’s time horizon (how close the investor is to retirement) and what returns their portfolio needs to provide.

A higher risk tolerance may mean a portfolio skewed more toward certain volatile asset classes, like stocks. Lower risk tolerance may lead an investor to shy away from volatility and focus instead on investments like bonds. A high risk tolerance may offer potential for higher returns in exchange for higher risk; a low risk tolerance, on the other hand, may offer slower-growing returns but less volatility and risk. 

Investors assess their risk tolerance when they begin to save for retirement and at various stages in their retirement-savings journey. It’s also common for portfolio managers and robo-advisors to adjust a portfolio’s risk tolerance automatically as investors’ needs evolve.

4. How much can you afford to contribute monthly?

Saving for retirement typically involves making consistent contributions to various accounts, often on a monthly basis. But depending on factors like salary, household expenses, and employer-matched contributions, individuals’ contribution amounts will vary. 

To create a retirement strategy, investors need to know how much they can reasonably contribute to their retirement savings each month or year. This determines: 

• How much they will be able to save before retirement
• How much income their savings will provide throughout retirement
• How aggressive their investments will need to be 

5. What other income-producing assets will you have in retirement?

A retirement savings portfolio might not be the only asset available for retirement income. Other income-providing assets might include:

• Annuities
• Investment property/rental income
• Pensions
• Government benefits like Social Security

If other assets will be available to provide retirement income, an investor may not need as much growth from their investment portfolio. This can affect how much the investor needs to contribute monthly and the risk tolerance they need to accept in that portfolio.

The bottom line 

Saving for retirement is one of the biggest financial tasks most people will undertake. By considering their retirement goals and financial situation, today’s employees can learn how to choose a retirement portfolio and maximize those savings for decades to come.