How To Build an Investment Portfolio for Retirement

Focus on growth now and income later

Fact checked by Vikki Velasquez
Reviewed by Brandon Renfro

To live out your retirement in comfort, you will need a carefully managed investment portfolio. Your retirement portfolio, which is the sum total of all your investments across various accounts, grows throughout your working years so that it can provide you with the income you need to maintain your lifestyle after you’re done working.

As your risk tolerance and time horizon change throughout your lifetime, your investment portfolio and strategy probably will also need to change. Learn how to build and maintain a sustainable investment portfolio that fits your financial goals and investment style, and provides for your retirement needs.

Key Takeaways

• When saving for retirement, take advantage of the power of compounding by starting to save and invest as early in life as you can.
• Try to rebalance your investment portfolio as you age and your investment goals, risk tolerance, and time horizon naturally change. 
• Experts suggest focusing on growth investments as a young investor and then shifting gears towards income and capital preservation as you near retirement.
• Regardless of your age, portfolio diversification can help you maintain more stable and reliable investment returns.

What Is an Investment Portfolio?

An investment portfolio encompasses all the investments you have in various accounts, including:

• Employer-sponsored plans like 401(k)s
• Individual retirement accounts (IRAs) like traditional, Roth, SEP, SIMPLE IRAs
• Taxable brokerage accounts
• Robo-advisor accounts
• Cash in savings, money market accounts (MMAs), or certificates of deposit (CDs)

These accounts can hold different types of assets, including (but not limited to) stocks, bonds, exchange-traded funds (ETFs), mutual funds, commodities, futures, options, and even real estate. Together, these assets form your investment portfolio.

If you’re investing for retirement, an ideal portfolio would be designed to meet your financial needs for the rest of your life once you retire from the workforce. This requires that you begin saving your money and buying investments as early as possible so your returns can compound over a long period and boost your portfolio’s value. By giving your money its greatest opportunity to compound, it truly works for you through the years.

An ideal retirement portfolio also calls for a focus on a large percentage of growth investments in your earlier years. Equities, growth stocks, in particular, are such an investment.

Growth Stocks

Retirement plans are designed to help investors increase the value of their investments over long periods. Growth instruments, such as stocks and real estate, typically form the nucleus of most successful retirement portfolios during the growth phase.

It is vitally important to have at least a portion of your retirement savings grow faster than the rate of inflation, which is the rate at which prices rise over time. Investments that grow more than the inflation rate can counteract the erosion of purchasing power that results from inflation.

Stocks have posted the best returns over time by far of any asset class. From 1926 to 2023, large-cap stocks averaged 10.3% growth per year. Small-cap stocks averaged 11.8%. Government bonds averaged only 5.1%, and Treasury bills posted 3.3% growth.

For this reason, even retirement portfolios that are largely geared toward capital preservation and income generation often maintain a small percentage of equity holdings to provide some growth potential and a hedge against inflation.

10.3%

The average annual compounded return of large-cap stocks from 1926 to 2023.

Portfolio Diversification

Diversification refers to incorporating distinct asset types and investment vehicles to limit the effects of risk and negative performance of any one asset. Diversification will take a different form over time. When you’re in your 20s, you may decide to diversify your portfolio among different types of equities, such as large-, mid-, and small-cap stocks and funds, and perhaps real estate.

Once you reach your 40s and 50s, however, you may want to move some of your holdings into more conservative sectors. These include corporate bonds, preferred stock offerings, and other moderate (less aggressive) instruments that can still generate competitive returns—but with less risk than pure equities.

Alternative investments, such as precious metals, derivatives, oil and gas leases, and other non-correlative assets, can also reduce the overall volatility of your portfolio. They can also help generate better returns during periods when traditional asset classes are idle.

An ideal retirement portfolio should not be weighted too heavily in shares of company stock. A big drop in its value could drastically alter your retirement plans if it constitutes a large percentage of your retirement savings.

Risk Tolerance

Risk tolerance refers to the amount of volatility in the value of their investments that an investor is willing to endure. As you approach retirement age, your risk tolerance often changes, and you may need to focus less on growth (equities) and more on capital preservation and income (fixed-income securities).

Instruments like CDs, Treasury securities, and fixed and indexed annuities may be appropriate if you need a guarantee of principal or income.

However, your portfolio should not become exclusively invested in guaranteed instruments until you reach your 80s or 90s. An ideal retirement portfolio will take into account your drawdown risk, which measures how long it will take you to recover from a large loss in your portfolio.

Active vs. Passive Management

Investors today have more choices than ever when it comes to how to manage their money. One of these choices is active vs. passive portfolio management. Many financial planners exclusively recommend portfolios of index funds that are passively managed.

Others recommend actively managed portfolios that may post returns that are superior to those of the broader markets. However, actively managed funds typically charge higher fees, including transaction fees. That’s important to consider since those fees can erode your investment returns over the years.

Another option is a robo-advisor, which is a digital platform that allocates and manages a portfolio according to preset algorithms triggered by market activity. Robo-advisors typically cost far less than human managers. Still, their inability to deviate from their programs may be a disadvantage in some cases. And the trading patterns they use can be less sophisticated than those employed by their human counterparts.

Important

Robo-advisors may not be the best choice if you need advanced services such as estate planning, complicated tax management, trust fund administration, or retirement planning.

What Is a Good Investment Portfolio for Retirement?

That depends on your age and how close you are to leaving the workforce. When just starting out, aim for an aggressive investment stance that’s heavy on equities, which historically have outperformed fixed-income investments. You have time to recover from drops in the market and declines in your portfolio’s value. You can adopt a more conservative investment stance as your risk tolerance changes (e.g., as you near retirement). Remember that you should always include some growth component in your portfolio to protect against inflation and so that you don’t outlive your savings.

What Should My Portfolio Look Like at 55?

Begin by evaluating your tolerance for risk at that age and decide how focused on growth you still need to be. Some financial advisors recommend a mix of 60% stocks, 35% fixed income, and 5% cash when an investor is in their 60s. So, at age 55, and if you’re still working and investing, you might consider that allocation or something with even more growth potential.

What Is the Best Advice for Someone Planning for Retirement?

Perhaps the best advice for someone planning for retirement is to start saving and investing as early as possible. Time is your greatest resource in retirement planning. By managing your money as early as you can, you can take advantage of compounding to add value to your portfolio without lifting a finger.

The Bottom Line

Most people define an ideal retirement investment portfolio as one that allows them to live in relative comfort after they leave the working world. Your portfolio should always contain the appropriate balance of investments for growth, income, and capital preservation. However, the weight of each of these components should be based on your personal risk tolerance, investment objectives, and time horizon.

You should generally focus your portfolio either completely or predominantly on growth until you reach middle age, at which time your objectives may begin to shift toward income and lower risk.

Different investors have different risk tolerances, and if you intend to work until a later age, you might be able to take greater risks with your money. The ideal portfolio is, thus, always ultimately dependent upon you and what you are willing to do to reach your goals.