It’s the ultimate balancing act: ensuring you have an adequate nest egg to thrive during your retirement years. Unfortunately, there’s no one-size-fits-all solution when it comes to crunching the numbers. A multitude of factors ranging from your health to location can significantly impact the amount of money required to comfortably sustain you through your retirement years. You’ve put in years of hard work—the following are some important steps to take so that you’re well-positioned to enjoy the fruits of your labor.
Understand the Inherent Risks of Your Retirement Investments
All forms of investment carry some inherent risk, but how do you go about determining the risk level of a specific investment? The first step is grasping the two main components of risk: (1) the probability that an investment will fluctuate in value, and (2) the extent to which the value could potentially fluctuate. A simple way to assist in gauging investment risk is to keep in mind that investments associated with more risk correspondingly carry higher potential returns or losses.
The key to sustaining a successful investment portfolio is to balance the varying risks of your assets. For example, say you’re weighing the pros and cons of two investment opportunities: the first company is a well-established industry leader with little inherent risk; the second is an emergent young company with promising potential in a new market with considerable inherent risk for investors. The amount you invest in each depends on your own unique risk tolerance as well as when you plan on accessing your money.
A common rule-of-thumb is to balance your portfolio distributions based on your age. For instance, a 45-year old would invest 45% of his funds into fixed income assets and the remainder into equities. Again, keep in mind that this is just a guideline—your own investment strategy may differ if you have a higher risk tolerance—in which case you should consider diverting more capital to equity holdings; or, on the other hand, anticipate having to retire earlier than expected—a scenario that calls for a more conservative approach centered around fixed income investments.
Diversify for Consistent Returns
Historical market data indicates that returns associated with certain asset classes including real estate investment trusts (REITs) and international equities do not positively correlate in relation to US equities. Still, investors should consider incorporating them into their portfolio. Why? Different sectors of assets essential hedge against each other, meaning that their respective market performances are not strongly correlated. You need to include a variety of assets that move in different directions at different times in order to properly balance your portfolio. That way, if one correlated sector of the market has a particularly weak year, the net performance of your portfolio is minimally affected due to the performance of non-correlated holdings.
Have a Post-Retirement Plan for Your 401(k)
Retirees often struggle with deciding how to utilize their employer-sponsored 401(k) retirement accounts. You could take the no-frills approach of leaving this asset alone, and simply withdraw the minimum required distribution if you’re more than 70 ½ years old. Keep in mind, however, that since you aren’t an employee anymore post-retirement, you are precluded from making further contributions to your 401(k)—a major hurdle if you have additional sources of income you want to add to it.
So what are your best options when it comes to making your 401(k) work for you? Ideally, you’ll want to adjust your investment strategy in favor of increased stability and reduced risk. With government bond interest rates not what they used to be, more and more retirees are opting to roll their 401(k) assets into a self-directed IRA, and then repurposing those funds to invest in diversified real estate portfolios specializing in trust deed investments. This particular real estate investment sector provides stability with the added benefit of returning consistent month-to-month earnings that enables you to realize the interest on your investment in no time.
Diversify Your Portfolio with Mortgage Pool Funds
Due to their relatively low correlation with the performance of stocks and bonds, mortgage pool funds are the ideal asset in balancing out your portfolio. These unique holdings are real-estate backed fixed income instruments that have proven resilient to both market volatility and inflation—two of the most significant investment risk factors—by leveraging the inflation hedging advantages inherent to real estate assets without the added risk that comes along with direct property ownership such as unfavorable liquidity. Consider the added benefit that mortgage pool funds offer an additional safety net by sustaining a significant spread between the loan total and the property value securing the loan, and it’s easy to see why this niche investment approach is steadily gaining in popularity among savvy retirees.