A major component of a successful retirement portfolio stocks. To build a nest egg large enough to fund your life in retirement, which could last 30 years or more, you will need the growth that stocks provide. Investing in stocks is a tricky proposition though. In spite of the volatility in the markets, stocks have been excellent long-term investments for many decades and will continue being so. Regular investing in equities, through bull and bear markets, should be part of your strategy for building an investment portfolio you can tap in retirement.
So most people invest in a mix of stocks and bonds, enabling them to both capture some of the long-term growth of stocks and benefit from the relative stability of bonds during stock market downturns. These days, people own mostly stocks and use bonds as a counterbalance. Nevertheless, in even the most conservative retirement portfolio you will find some stocks.
After you have set up your retirement account, your next task is to determine which investment options may be available to you.
If you are enrolled in your employer’s 401(k) plan, your choices are usually limited—but diversified. A 401(k) account should generally include a variety of investments including U.S. and international stock funds and bond funds. If you have opened an IRA, whether it is a traditional IRA or a Roth IRA, you have many more choices, generally limited only by whether you have chosen a brokerage account or a mutual fund account.
If you choose to open your IRA as a brokerage account, you can typically invest in pretty much anything, including individual stocks. For a balanced portfolio, you will probably want to look at international and domestic bonds, U.S. large-cap stocks, U.S. small-cap stocks, international stocks, emerging markets stocks and some real estate investments. The right allocation to each of these investments depends on how long you have until retirement and your tolerance for risk in your portfolio.
Today’s tax rates are meaningful, but what really will count are the tax rates in effect in the future, when you draw down your portfolio for retirement income. Perhaps you will have a low tax rate then, without earned income, so paying ordinary income tax on IRA distributions would not be terribly painful. Alternatively, ordinary income tax rates may be much higher in the future, so the IRS‘ share of your stock market gains could be greater when you withdraw those profits from your IRA.
If you put all your investment eggs in one asset class, you are not protected if that particular asset class tanks. By diversifying your holdings, you can help ensure that even if one part of your portfolio does not do well, there is always something faring better, ensuring your portfolio will grow over time.
No one has a crystal ball about future personal income and tax rates. Nevertheless, you should keep the tax aspects in mind when you decide whether to hold your stocks and stock funds in a taxable or tax-deferred account. GKM’s professionals can help you crunch the numbers, so you can make informed decisions.
