Question

What types of investments are best for a retirement portfolio? How should the mix of investments change as you get older?

Answer 1

There are several ways to line up investments in such a way to produce the income or cash flow you'll need in retirement.Some of the types of investments that are best for a retirement portfoilo are :

• Certain income / low stress portfolio :Creating a certain outcome means using only safe investments to fund your retirement income needs. You might use a bond ladder, which means buying a bond that would mature in that year for each year of retirement. You would spend both the interest and principal in the year the bond matured.
• Total return portfolio :The concept behind “total return” is that you are targeting a 10 to 20-year average annual return that meets or exceeds your withdrawal rate. Although you are targeting a long-term average, in any one year your returns will deviate from that average quite a bit. To follow this type of investment approach, you must maintain a diversified allocation regardless of the year-to-year ups and downs of the portfolio.
• Immediate Annuity portfolio : With an immediate annuity, you are ensuring your future income. In exchange for a lump sum payment, the insurance company is providing you guaranteed income for life (or for some other agreed upon time frame). The guarantee is as strong as the quality of the insurance company that issues it.
• Time segmentation portfolio : This approach involves choosing investments based on the point in time when you'll need them. It's sometimes called a bucketing approach.
• Combination portfolio : It is a combination of "Certain income" and "Time Segmentation portfolios.
• Interest Only portfolio : For investors who like to do research and pick individual securities, and who are ok with having their cash flow vary from year-to-year, this approach can work well.

-One of the most basic principles of investing is to gradually reduce your risk as you get older, since retirees don’t have the luxury of waiting for the market to bounce back after a dip. The dilemma is figuring out exactly how safe you should be relative to your stage in life.

The mix of investments with the age you get older is that a simple logic called as thub rule which is that your age should be the count to your investment in debt securities. That is for example if a person is aged 40 his investment should be 40% of debt allocation and 60 % should be allocated to equity .