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How to Create a Foolproof Retirement Plan

Personal_Finance / Pensions & Retirement Apr 20, 2020 - 02:26 PM GMT

By: Submissions


 One of the main rules to remember when drafting a retirement plan is to make sure not to run out of money. The second essential rule is never to ignore the first rule.

Very few people want to take significant risks when making investments for their retirement plans. Retirees want to stick to zero risk investments such as treasury bonds to avoid any unforeseen losses. However, these “safe investments” do not offer a substantial payback when it comes time to withdraw, and often the savings dry out way before time even if the retiree is making moderate withdrawals over their lifetime. To avoid these situations, it is essential to keep an investment portfolio diverse, keeping the need for safety of the investment and capital preservation both in mind. It is also crucial to consider factors such as economic growth and hedge inflation when designing a portfolio. This will keep the retiree safe from drying out their savings earlier than expected.

Having a Balanced Portfolio: 

Even though various studies have proven that a completely safe investment portfolio, which includes zero risks, will not reach the retiree’s economic goals. It is also crucial to keep in mind that diving head-on into risky investments is also not the ideal way of designing a retirement portfolio. Therefore, a diverse portfolio is the best way to go, and this can include a range of investments such as treasury bonds, stock market investments, and buying a property with the hope of later selling it at an increased price or even investing in precious metals such as gold and silver. Many investment advisors are seen advising their clients to make investments in precious metals and make them a crucial part of their retirement savings plan as precious metals hold a high value in the economy.

An example of a reliable company that can easily help you roll over your money into precious metals is Noble Gold Investments. They are a gold IRA company that is devoted to providing clients with transparency and educating them about properly investing in precious metals. With a minimum investment of just 2000 USD, clients can start their savings with Noble Gold Investments. 

Total Return Portfolio vs. Income:

The past generations have been investing in an income-based portfolio. Investments were made to generate income, such as buying a house and renting to generate income or buying a shop and putting it up for rent. When the people of that generation made investments, these investments usually consisted of dividend stocks and convertible bonds. The thought behind developing such a portfolio was to be able to survive off of the income. These investments, however, proved to be riskier with a lower return rate as with effects of inflation and changes in the economy affect all such investments in the same manner and what these portfolios lacked was a failsafe. The modern system encourages investors to move away from income-based investments and concentrate more on the investments promising a higher total return. 

What is the Total Return Investment Approach? 

A total return on investment strategy usually includes a portfolio that is successfully diversified between fixed income and equity as well as pays attention to capital gains to find the needs of the retiree. This proves to be a safer way to invest rather than relying solely upon the income side of your portfolio and not touching the principal. One of the main benefits a diverse portfolio offers compared to an income-based one is the steadier and more significant returns over time. This means that as time passes and economic conditions stay in your favor, you are making more returns. It also enables the investor to maintain their risk profile by making sure they are not altering their portfolio significantly at a time of need or costing themselves unnecessary trading costs.

Many people, however, still believe that an income-based portfolio is the safer route and contains less risk. This statement has been proven to be untrue, and having a solely income-based portfolio can be a greater risk when you have to liquidate your assets in times of need.

The next question then arises, what are the best proportions of maintaining a diverse portfolio while minimizing risks and maximizing returns. This can be done easily by following a few steps:

  • Start with choosing a withdrawal rate substantial enough to support your lifestyle while being sustainable enough not to harm your portfolio. The 4% mark has been selected by many people to be satisfactory enough to carry a reasonable lifestyle while allowing the collection to grow over time. 

  • Another trick is to keep the 40-60 ratios in mind. 60% of your portfolio should consist of well-diversified assets, which preferably include 10-12 various equity classes, and the rests of the 40% should consist of short term investments such as bonds. 

  • It is also essential to keep in mind that one should generate the money for distributing dynamically as per the demand of the circumstances. 

Keeping the balance maintained: 

Another crucial part of successful investments is to make sure you maintain your portfolio at all times. Keeping the balance between the ratios of the investments and rebalancing when required. It is also critical to make sure to keep the balance between the various assets which you have invested in. Following the general rule in mind of selling at a high price and buying at a low price proves to be beneficial in the long-run performance of your portfolio. 

An easy way to maintain the balance if your portfolio is to evaluate it from time to time, keeping in mind the space allotted to certain assets and selling them if they have exceeded those limitations. 

The Bottom Line 

In a world that is focusing on low-interest rates, it is easy to lose sight of your goals and gravitate towards investments that offer higher yields. However, it is essential to keep in mind that no matter the reason behind developing your portfolio, a diverse and well-distributed portfolio will always prove to offer higher returns with minimal risk involvement. 

By Helen Bell

© 2020 Helen Bell - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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