Building out a diversified retirement portfolio
A retirement portfolio requires a solid foundation which is centred on a good savings and solid investment strategy. This foundation can be created with several elements namely: membership in an approved pension arrangement, participation in collective investment schemes (CIS), and purchasing bonds or equities. While as an individual these options do not represent the only choices available, it is critical that there is an appreciation of the importance of each element in the creation and build out of a diversified retirement portfolio.
The first element of your retirement portfolio is your contribution to either an employer-sponsored pension plan or approved retirement scheme. Employer- sponsored pension plans allow for employee deferrals and are powerful saving tools. Contributions are deducted from your salary as pre-tax contributions (reducing your current taxable income) and any investment earnings are tax-deferred until distribution at retirement. These plans often include employer- matching contributions, and should be your first choice in saving for retirement. For persons who do not have access to an employer sponsored pension plan, an approved retirement scheme is an option that can be pursued.
An additional element to your retirement portfolio should be bonds and/ or equities. This investment can serve as a stream of income during retirement to supplement your retirement income, and assist you to maintain your desired standard of living. Inclusion of bonds in your investment portfolio, assists in providing an income stream. Generally, investors receive fixed interest income periodically over the life of the bond, while the face amount, or principal, is repaid upon maturity of the instrument. For people 5-10 years away from their desired retirement age, the recommended percentage of bonds in a portfolio varies from 15-60%.
This variation is influenced by several factors, such as: number of years before retirement, the level of dependence on your investments for retirement income, and risk tolerance. Bonds with high yields, US$ Investment grade bonds and bonds indexed to inflation should be considered for your retirement portfolio, as they protect the investors' purchasing power in the long-term.
Individual stocks can also be beneficial in the creation of your retirement portfolio, providing both growth and income. With at least 20 years to retirement, stocks are a valuable inclusion, as over the long-term they usually provide the best return. Blue chip stocks with high dividend yields and/ or stocks with a high probability of price appreciation, may be included in your retirement portfolio.
The third element of your retirement portfolio is your contribution towards collective investment schemes (CIS). This allows you to adequately diversify your portfolio. CIS offers multiple options ranging from money market funds to equities based funds. Each fund comprises a range of individual assets, which ultimately, through this diversified approach reduces the risk of investing. These funds can be utilized to satisfy short, medium and long-term objectives. In addition, CIS provides flexibility, ease of payment and are managed by a team of investment professionals, so that daily investment decisions are not necessary for the individual.
In the build out of your retirement portfolio, a diversified approach is best in reducing risk and increasing the potential for positive returns in the future. Therefore, the inclusion of the aforementioned elements: employer-sponsored pension plan or approved retirement scheme, bonds, equities, and collective investment schemes (CIS) are excellent ways to diversify your portfolio for retirement.