3 ways to improve your retirement portfolio

Consider your risk tolerance, asset allocation, and investment diversification.

Wealth seldom results from luck, inheritances, or advanced degrees, according to research studies on millionaires by Stanley and Danko. Instead, they found that being frugal is the cornerstone of wealth building. Habits include a low-consumption lifestyle, having a budget and plan, following the “Pay Yourself First” strategy, and minimizing realized taxable income. Consider these utilizing these habits to improve your retirement portfolio.

Dr. Barbara O’Neill is a financial education expert. She recently presented a webinar on Wealth Building with Savings, Investments, and Windfalls.  Her top three points are explained in this article.

First, set clear investment objectives, goals, and identify your risk tolerance. Developing an action plan and tracking your progress will help you keep it simple and stay on your course.

Second, asset allocation is the most important decision an investor makes because it determines about 90 percent of the return variation between portfolios. Asset allocation is the ratio of stocks, bonds, cash assets and other securities. A simple example is 50% stock, 30% bonds, and 20% Treasury Bills. A loss in one type of investment may be offset by a gain in another. Good results are generally achieved over time. It is important to diversify holdings within each asset category. Buying stock from different industry sectors or different types of bonds with different maturities are ways to achieve diversification. The asset allocation process is:

  • Define your goals and time horizon (how many years to retirement).
  • Assess your tolerance for risk and investment experience.
  • Identify the asset mix of your current portfolio, using one of these calculators: Bankrate, Smart Asset, CNN Money or Yahoo! Finance.
  • Create a target portfolio and the amount of money you have to invest, your age and net worth.
  • Have a specific investment selection based on your investment objective.
  • Review and rebalance your portfolio when asset percentages change by a certain amount (for example, 5 percent) or on a fixed schedule.

Third, diversify to reduce your investment risks. Review both your asset allocation and asset classes (stocks, bonds, and cash assets). The longer you are invested in stocks, the greater your chances are of making money. However, you must decide during retirement to keep at least five years’ worth of expenses--minus Social Security and a pension--in cash to ride out market downturns. You can take advantage of six “Time Maximizing” financial practices:

  1. Dollar cost averaging: making regular deposits at regular time intervals.
  2. Tax-deferred investing: postpone taxes to a future date.
  3. Roth IRA Conversion: grow tax deferred. Earnings withdrawals are tax-free in some cases.
  4. Tax-Efficient Withdrawals: tap taxable and tax-free accounts first.
  5. Long-Term Capital Gains: Investments held more than a year are taxed at favorable rates.
  6. Stretch IRA’s: Named beneficiaries of tax-deferred plans can benefit. Use this calculator to help. 

O’Neill suggests that you keep improving your retirement investment knowledge using these resources: Investing For Your Future, FINRA Investor Education Foundation, Better Investing, Value Line, Morningstar, Save, and Invest or MyMoney. You can also watch a recording of O’Neill’s webinar to learn more.

Investing for retirement takes time, patience, and discipline. Time is your friend and impulse is your enemy. If it is too good to be true, it probably is. If you do not understand it, do not buy it. Diversify. Sometimes it helps to have insight from a professional and access to an assortment of resources. Additional resources on saving and investing can be found on the MI Money Health program page on the Michigan State University Extension’s website. 

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