Investing for retirement: How to build an investment portfolio for retirement

Highlights

• It is a well-known fact that the global population is ageing. With the prospect of living in retirement for several decades, a typical retirement nest egg coupled with the measly state pension will not provide the sufficient financial protection needed.
• This is why building an investment retirement portfolio is a good way to prepare your finances.
• Before you delve deeper into how you should go about building your portfolio, consider creating a retirement plan. This should include things like your time horizon, the budget you’ll be needing during retirement and any sources of income that you may have in your later years.
• One of the most important advantages of building a retirement portfolio is that it can provide stability for your future, while the returns from your portfolio can help supplement the government pension you will be receiving.
• Wondering when you should start building your portfolio? The earlier you start investing for retirement, the more money you will have when it is time to withdraw the funds. At the same time, as you progress in life, you can make various adjustments to your portfolio.
• Based on your age and risk tolerance, there are various methods and strategies you can use to build your investment portfolio for retirement.
• With the aim to increase the value of your investments, a growth retirement portfolio generally favours asset classes such as stocks, which are known to have historically delivered high returns. However, you can opt for a mix of stocks and bonds that are expected to deliver your desired average return over time.
• Designed to offer long-term sustainability, a retirement portfolio based on income is ideal for those who would like a steady stream funds and to be able to live off any interests or dividends that their investments offer.
• Seeking a moderate level of risk and return, a balanced portfolio invests in an even split of stocks and bonds so that it can offer good income with sufficient liquidity.
• If you’re unsure of how to go about building your portfolio for retirement, you may want to get help from a financial advisor. Get in touch with Calamatta Cuschieri’s professionals today to book an appointment.

Statistics and projections produced by various organisations and entities across the world have long shown that the global population is ageing. Indeed, according to the United Nations (UN), in 2020, there was an estimated 727 million persons aged 65 years or over worldwide, with this number expected to more than double by 2050, reaching over 1.5 billion individuals. As a result, retirement has become more complex than ever. With the prospect of living in retirement for several decades, often the same time frame an individual spends working, a typical retirement nest egg coupled with the measly state pension will not provide the sufficient financial protection needed. Additionally, local statistics show that less than 6% of local employed individuals have a private pension scheme in place.

One way of preparing your finances for retirement is to build an investment retirement portfolio. Serving as a basket that holds all of your investments, ideally your portfolio should grow with you and provide the income you need to live out your post-work years in comfort.

Here are some ideas of how you should go about building an investment portfolio for retirement.

Why do you need an investment portfolio for retirement?

Locally, pensions are typically paid from either the state pension which provides a basic standard of living financed through your Social Security contributions, personal private pension schemes, such as the Lifetime Private Pension Scheme or occupational private pension schemes like the Lifetime Occupational Pension Scheme, both of which are available through Calamatta Cuschieri. Crunch the numbers and you’ll soon realise that the approximately €230 per week you will begin receiving at your 65th birthday by the government – depending on your eligibility and the contributory retirement category you qualify for – will not stretch too far, making it highly unlikely that you will be able to carry on enjoying your current lifestyle during retirement.

What’s more, as the number of people paying into the social security pot is dwindling compared to those being retired and receiving pensions, the only way to keep the current system going is if employees contribute more or retirees receive less of a pension. As a result, having an investment portfolio for retirement is imperative.

How can I prepare to build my retirement investment portfolio?

Before you delve deeper into what you should include in your portfolio, consider creating a retirement plan. From delineating your sources of income to estimating your expenses and managing your assets and risks amongst other things, crafting a retirement plan will help you reach your retirement goals. Just remember that this should be a lifelong process and not something carried out when your retirement date draws nearer. And like any other type of plan, it should clearly outline important factors that could make or break your retirement. Here are some things to keep in mind:

• Understand your time horizon – locally the retirement age is set to increase gradually to 65 years by 2027, however, there is the option for early retirement if you fit certain criteria. Your current age and expected retirement age can create the initial groundwork of an effective retirement strategy.
• Determine your budget in retirement – you must establish the budget you think you will be needing during your retirement, which in turn will condition the investment strategy you need to undertake, as well as the type of assets you should include in your portfolio.
• Establish your sources of income – hitting retirement does not necessarily spell the end of your working days. Depending on your retirement age and whether you’ll have the energy to keep on pushing, you may decide to work part-time or on a freelance basis. Knowing your likely monthly income and returns can help you create a more effective investment portfolio.
• Consider protecting yourself – unfortunately, retirement age may bring along age-related illnesses, which may require long-term care. This is why it is important that you allocate an amount of funds for this specific purpose. In addition, you may want to consider protecting both yourself and your loved ones with life insurance.

What are the benefits of a retirement portfolio?

Without a doubt, one of the most important advantages of building a retirement portfolio is that it can provide stability for your future. Not only can the returns from your portfolio supplement the government pension you will be receiving, but it could potentially prevent you from having to live on a fixed income. At the same time, if your retirement portfolio is diversified enough, it can protect you from any potential market volatility by balancing different income classes. In this manner, if one asset class drops in value, the others will be able to offset that.

When should you start building your retirement portfolio?

The earlier you start investing for retirement, the more money you will have when it is time to withdraw the funds. Ultimately, your returns should outpace inflation, otherwise, it will be increasingly harder for you to maintain your purchasing power during retirement. Even an inflation rate of say 3% can quickly erode the value of your savings by 50% over approximately 24 years.

Generally speaking, an ideal portfolio should contain a growth component and this can only be established during your younger years when you have a longer-term horizon. Also, the longer the time between today and retirement, the higher the level of risk your portfolio can withstand. As your time horizon narrows, a balanced portfolio can help retain a moderate amount of growth, which would be more appropriate as you mature in your career, offering at the same time, more protection against market volatility. In contrast, the older you get, the more your portfolio should be focused on income and the preservation of capital, providing long-term sustainability. What’s more, at this point in your life, there is less concern about inflation. If you’re one year away from retirement, there is no need to worry about a rise in the cost of living when compared to a young professional who has just gotten their foot in the door and are at the very bottom of their career ladder.

But unless you have begun building your retirement portfolio at a young age, none of the adjustments mentioned above can take place.

Types of retirement portfolios

Based on your age and risk tolerance, there are various methods and strategies you can use to build your investment portfolio for retirement. Below are three possible options:

A growth retirement portfolio

With the aim to increase the value of your investments, this type of portfolio will generally favour asset classes such as stocks, which are known to have historically delivered high returns, yet, you can opt for a mix of stocks and bonds that are expected to deliver your desired average return over time. For example, you may want to allocate around 60% of your portfolio’s total weight to equities and 40% to bonds. As for the underlying mix, the former could include local and foreign large, mid and small-cap stocks, as well as those from emerging markets, while depending on your portfolio’s timeframe, you may also include commodities. On the other hand, when it comes to the bond portion of your portfolio, consider funds with a relatively low duration, most especially due to the rising interest rate environment and the fact that long-term bonds tend to be most sensitive to interest rate changes.

If this type of portfolio matches your retirement goals, consider the following tips:

• Examine other asset alternatives: as mentioned above, stocks are known to offer great returns, however, they might be other asset classes poised for growth either due to geopolitical changes, economic headwinds or unmet demand, among other reasons.
• Reduce your risk: one of the best ways to offset your exposure to risk is to diversify your portfolio. A strategy that mixes a wide variety of investments within the same portfolio, diversification aims to reduce the exposure to any one particular asset or risk. Your holdings can be diversified across asset classes and within classes or geographically by investing in both domestic and foreign markets. Find out more about the importance of investment portfolio diversification.

An income retirement portfolio

At the time of one’s retirement, an income portfolio is designed to offer long-term sustainability. A retirement portfolio based on income is ideal for those who would like a steady stream of income and to be able to live off any interests or dividends that their investments offer. Typically consisting of high-yield investments like bonds and stocks, the goal with this type of portfolio is to leave your original investment intact, while if the generated income stream is reinvested and compounded, then it may increase the value of your investment over time.

Here are some tips to follow with an income retirement portfolio:

• Consider high-yield ETFs: stocks and their dividend payouts are often popular with an income portfolio, however, some ETFs can offer a steady income based on dividends, while they invest in a wide variety of asset classes, geographic areas or business sectors, instantly offering diversification to your portfolio.
• Explore equity funds: a type of mutual fund also known as stock fund, its purpose is to buy ownership in businesses via a basket of stocks. In other words, investors buy shares of the fund which then purchases stocks in a range of companies. More specifically, the objective of equity funds is to identify opportunities to invest in businesses that are expected to grow, returning a profit to its holders, as well as providing long-term growth through capital gains. Here is some more information about equity funds and how they work.
• Invest in a variety of bonds: while government bonds may be a safe bet and often serve as the foundation for many income portfolios, investing in corporate or global bonds in addition to government bonds may offer higher yields. Have a look at this comprehensive guide explaining everything there is to know about bonds.

Wondering how you can generate an income stream from your investments? Discover more about dividends and how they can help reinforce your income and here are some ways to make money while you sleep.

A balanced retirement portfolio

Seeking a moderate level of risk and return, a balanced portfolio invests in an even split of stocks and bonds so that it can offer good income with sufficient liquidity to withstand any downmarkets. Although a balanced portfolio allocation can help avoid losses, you may not achieve the highest returns as markets tick upward. And even if you start off with a 50/50 split between different asset classes, your portfolio may become weighted in favour of one or other asset over time. To maintain a medium risk level, your portfolio manager may have to reallocate gains, in other words, proceeds for selling successful stocks are used to purchase more bonds and even out the portfolio.

If you’re looking to build a balanced portfolio for retirement:

• Evaluate the risk-return trade-off: an investment principle, the risk-return trade-off indicates that the higher the risk, the higher the potential reward, but to calculate this, several factors come into play, such as overall risk tolerance, the potential to replace lost funds and much more. As you balance across your asset classes, keep an eye on their underlying risks.

Find out more about basic investment strategies and how to choose the right one for your portfolio.

How to maintain your retirement portfolio

It’s important to check your asset allocation at least once a year to ensure that you are on the right track to achieving your financial goals and to meeting your retirement income objectives.

Reassess your appetite for risk

As you near retirement, you may want to take a fresh look at the risk you can afford to take. What will affect this to a great extent is your time horizon since you may not have the time to recover from any market downturns, so this could be a good opportunity to assess whether the proportion of your assets which are considered higher-risk is greater than it should be.

Adapt your strategy over time

A retirement portfolio needs to produce reliable cash flows that last the rest of your lifespan irrespective of the various market conditions that may occur. However, you may need to shift your strategy as time goes by. For example, investors in the early years of retirement may want a more moderate approach to investing, whereas if you’re well into retirement, you may benefit from a conservative approach.

Make your principal last

To make your money last for as long as you need it to you must be disciplined. This means that you may have to be more careful with overspending, particularly during your first few years of retirement. Another way to stretch your retirement income further is to conduct sound management of your yearly withdrawals from your portfolio.
Ultimately, there is no such thing as the perfect retirement portfolio. There are several ways to line up investments so that they can produce the income or cash flow you’ll need later on in your life. The portfolio approach that is best for your situation may be a combination of what has been outlined above.

If you’re unsure of how to go about it, you may want to get help from a financial advisor. Offering support to clients throughout the entire retirement journey, Calamatta Cuschieri’s financial advisors can help you plan for retirement and create the ideal retirement portfolio regardless at what stage you are. Get in touch with us today to book an appointment.

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