How do I create my portfolio?
When you contribute money to retirement accounts, you can choose how you want that money invested. It’s important to maximize your return within whatever level of risk you’re comfortable with.
That’s why Catch generally invests in sets of ETFs (Exchange Traded Funds), which are a bundle of a number of assets that generally decrease risk and increase diversification, rather than expensive mutual funds or individual stocks (which are more risky).
Here are some questions to ask yourself as you build your retirement portfolio and decide how to invest in it.
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What do you want your retirement income to be?
When thinking about your income during retirement, you can use your current annual expenses as well as any adjustments that might decrease your expenses (like children having grown up) or increase them (like plans to travel). You can also consider any other income besides your retirement accounts that you’ll be bringing in.
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When do you want to retire?
The answer to this question changes how many years you have to build your savings. There can also be financial benefits to waiting to retire, as Social Security increases the retirement benefit by a percentage if you delay retiring until age 70.
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How many years after retirement might you expect to live?
While this question may sound morbid and impossible to know for sure, it’s also practical. If you don’t want to think too hard about it, then you can use the average life expectancy for the US as a starting point, which is about 75 years old for men and 80 years old for women. However, it’s wise to imagine you may live longer than average to boost the chances that you save enough money.
If you can come up with rough answers to the above three questions - what you want your income to be after you retire, when you expect to retire, and a guess on how long you’ll live - then you’re able to come up an estimate of how much money you’ll need to save for retirement.
When it comes to making investment decisions, here are some more questions to consider:
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What’s your age?
As your age changes, the focus of your portfolio should also change, focusing less on growth and more on income. Retirement can last for a while (as long as a few decades even), so you want to make sure you have enough funds to last your entire life.
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What’s your risk tolerance?
Your risk tolerance greatly impacts your investment decisions. While some investment strategies may offer the possibility of a higher return, they generally also come with higher risk, meaning they could lose value. If you’re young, then you might allow yourself more room for risk, because you have time to wait for the market to rise it if falls. On the other hand, if you are approaching the age when you want to retire, then you’ll likely want to lower your risk, because you won’t have as much time to recover if the market drops and your investments take a hit.
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Do you want lots of stocks in your portfolio?
One basic rule of thumb for the appropriate level of risk is this: set the percentage in your portfolio of safer investments roughly equal to your age. An example of a safer investment is a government bond. If you’re 45 years old, for example, that would mean putting around 45% of your portfolio in bonds and the remaining 55% of your portfolio in stocks (ideally ETFs, low-cost and diversified bundles of many stocks, which also helps decrease risk).
Your risk tolerance may mean that you adjust those percentages up or down depending on who you are and whether you think you’ll also have other sources of income in retirement beyond your retirement accounts.
The above questions are useful to ask yourself annually, rather than only once. Each year, you can assess your portfolio, expenses, and future plans, then decide if you want to adjust your investments and track where you are in your savings goals. Planning for retirement can be stressful. Catch is here to help.