Retirement is a coveted stage of life when one hangs his boots with dignity just to sit back and cherish the beautiful moments. It comes as a relief from the hustle and bustle of a stressful working life, thus one has to make it a rewarding experience. However, it is stage when the regular flow of income stops and one needs to have a strong investment portfolio to cover one’s expenses and lead rest of the life without any dependence on others.
Thus, the importance of proper retirement planning at an appropriate age cannot be over emphasized. One of the most important characteristics of a prudent portfolio, apart from providing maximum returns, is the extent of its diversification. Diversification cushions your investment from various market shocks such as inflation, stock market fluctuations, global economic turmoil, and volatility in interest rates.
Various ways to diversify retirement savings are:
Estimate the number of years to retirement: If you have a lot of years to go before retirement such as a decade, you can allocate more funds to riskier assets so that it can reap higher returns and minimize short term losses. However, if you are nearing the retirement age, the portfolio should be diversified towards more conservative assets which offer stabilization.
Determine the risk appetite: Every individual has a different perception and approach towards risk which determines the risk appetite. If a person is risk averse, it is better to include assets that offer sustained returns over a long period at lower risk levels, whereas if you have the capacity to take more risks, you can put your savings is assets directly exposed to the markets.
Add tax diversity through Roth IRA: To add tax diversity to the investment portfolio, you have the option of pre-paying some of the tax on a part of the retirement savings with a Roth IRA accounts. The contributions to Roth accounts are made with after-tax dollars and withdrawal as well as the earnings after the age of 59 ½ years are tax-free.
Allocate savings between stocks and bonds: Putting all the eggs in one basket is a sure shot means to make the portfolio more risky. Thus, a proper distribution between equities, bonds and commodities has to be ensured for risk mitigation. Stocks are directly related to the capital markets and are more exposed to risk while bonds or debt funds provide fixed income and offers stability to the portfolio.
Taking health insurance: An individual becomes more prone to illness as the age increases, thus it is forms a major chunk of expenses during retirement. It is thus advisable to purchase a long-term health insurance plan through a Medicare or a private insurance company as a part of retirement planning.
Apart from the above, a prudent retirement planning and evaluation of the portfolio on a regular basis goes a long way in ensuring that the retirement savings are diversified and are placed according to a proper plan that guarantees returns as well as safety for a long term.
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