Your accumulation phase is the time in your life when you’re working, saving and preparing for retirement. It comes before the distribution phase, which is when you begin accessing the funds you set aside for retirement.
Your portfolio should be fluid, adjusting for each phase of your life. This article will give you a general overview of where someone in their accumulation phase should be with their investments, but by no means will these be the same for everyone.
I’ll give you some starting points to consider. Your own life situation, goals and risk tolerance will help fill in the gaps from there.
Accumulation Phase: Stocks
At this point in your life, your retirement portfolio should be pretty heavily weighted toward stocks – about 70 to 80 percent. Again, that won’t be true for everyone, but it’s a general rule of thumb.
Stock mutual funds are the preference here. Historically, mutual funds have performed better over time than any other investments. It’s important to go for growth as much as possible here, and one of the best investments, long-term, is stocks.
But how much should you have? Let’s say the inflation rate is 3%. You should target around 7% with your investments for a good rate of return. If you want to do that to prepare for retirement, aim for 70-80% stock mutual funds in your retirement account.
What kind of stocks should you go for? Stick to a higher percentage of large cap funds, which includes companies with a market capitalization value of more than $10 billion. (Think Microsoft, Amazon, Ford, Comcast, etc.) A good allocation of these is in the 30% to 50% range.
To round out your stock portfolio, you might want to invest in U.S. small cap funds, international, emerging markets and real estate.
Bonds in your Retirement Portfolio
You need a combination of stocks and bonds in your portfolio. In your accumulation phase, stocks are doing most of the heavy lifting by bringing in higher returns. But bonds are there to soften the blow of potential recessions. The returns are lower, but they do help insulate your investments should the market take a dive.
In our current interest-raising environment, it makes sense to have more higher quality, but shorter term, bonds. That’s because they are less effected when the Fed raises interest rates.
These asset classes can give you a bit more diversification and has the potential to give your portfolio more growth. However, it can get a little tricky when you’re creating an allocation between all of your accounts (like an IRA or 401k) and trying to have the same allocation throughout each account.
I like to be mindful of each account’s characteristics.
If you contribute to a Roth IRA, you can focus more on growth-oriented stocks. That’s because a Roth IRA has after-tax contributions, and you don’t have a required minimum distribution (RMD.) You won’t have to pay taxes on those big gains.
A 401(k) or traditional IRA, on the other hand, are tax-deferred. You may want to balance off your portfolio with bonds in these accounts because you don’t have to pay for dividends or interest each year. You only pay taxes when you withdraw money.
A taxable account and tax-free bond funds, like municipal bonds, are other areas where you want to make sure your investments aren’t producing a high amount of taxable income, especially if you are already a high income-earner.
Then there are index funds, a strong investment at a lower price. We can only control what we can, so it’s important to manage costs. Index funds are typically more affordable than mutual funds, and they have even been shown to outperform higher cost, actively-managed funds.
These can be mutual funds or exchange-traded funds (EFTs) that track an index.
The Vanguard cost tool is a helpful resource for comparing two funds to see how their costs could affect returns.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.