Knowing where to start when planning for retirement can be a challenge.
No two portfolios look alike because no two people have the same retirement needs — someone might require more exposure to dividend stocks while another person might look to international markets for more aggressive returns. This means there’s no universal example that people can model their own portfolios on.
Speaking with a financial planner can help wayward retirees find — and stay — on a path that best suits their retirement goals and provides income throughout their years.
There are many factors to consider when you begin planning for retirement, but experts that TheStreet spoke with agree these three specifically are crucial to remember.
Know Your Risk
Stay in your comfort zone when it comes to retirement planning.
Each asset has benefits and drawbacks that will affect your income streams during your retirement, and it’s important to know what your risk level is, experts say. Assessing your risk and knowing how comfortable you would be to adapting to market downturns, unexpected healthcare costs or any other expense that might come up in the future will make you a more prepared retiree.
If you’re a more conservative investor, it probably wouldn’t be the right move to overweight your portfolio with stocks that could respond harshly to market volatility such as tech stocks like Facebook (FB – Get Report) . On the flip-side, if you’re a more aggressive investor, more allocation toward equity shares would make sense so that you have a chance at a larger payday.
“Make sure you have those conversations before you retire and that your investments match your comfort level, amount of distribution and timing,” said Monica Dwyer, a certified financial planner at Harvest Financial Advisors. “Don’t go into anything that scares you so much that you lose sleep and sell out of the market because it can be the worst mistake you could ever make.”
Diversify Your Portfolio
One of the tenets of financial planning that any advisor will tell you is that diversification is king when it comes to your portfolio. Exposure to different assets can reduce your investment risk and provide different income streams and returns while also setting you up for some growth if you want it.
Stocks, bonds and cash are what usually come to mind when people think about traditional asset classes, but those should not be the only investment vehicles people should look to as options, experts say. Portfolios should be a mix of short and long-term growth assets to reflect the fact that retirees are long-term investors, said Rita Cheng, CEO of Blue Ocean Global Wealth.
Forms of insurance and annuities are some common alternatives to the more recognizable assets, but like with any portfolio, everything depends on your needs.
“Some people may say they are retired and they are and they need to access their portfolio,” Cheng said. “They need to balance security in the short term and growth in the long term.”
Plan for Inflation
The future is unpredictable and no matter how much you prepare for hypothetical scenarios that could arise, there is no way to know for sure what fate might throw your way.
But one constant that you can almost assuredly account for is that you’ll have to deal with inflated prices for goods and services as time goes on. What might be a sustainable withdrawal amount and balanced portfolio today might not be the right allocation choices tomorrow.
Knowing the risk inflation poses and adequately protecting yourself can lead to a more stress-free retirement, but you need to assess your portfolio to facilitate this insulation, said Matt Chancey, a certified financial planner with Micel Financial.
Chancey advises his clients to make sure their portfolios increase on a net basis with inflation overall. This means creating a portfolio that factors in your costs increasing in the future, especially with healthcare coverage. Not having a strategy that provides income and enough growth to combat inflation could leave you deciding if you have enough money to go out to eat or paying for that next prescription refill, Chancey said.
“If you don’t model these things, at the end of the day, you could be left with not enough income to have options,” Chancey said.