Building Your Retirement Portfolio

These days, it’s common for retirement to span multiple decades—which means our savings really has to stretch. Thoughtful planning and early saving can go a long way towards helping you achieve the lifestyle you want in retirement.

The IRS suggests you’ll need up to 80 percent of your annual working income to maintain your quality of life once you are no longer taking home a regular paycheck.¹ Getting there may involve foresight and discipline to save throughout your career—but it also requires making the most of the tools at your disposal.

First Things First: Enroll as Soon as You’re Able

It may seem obvious, but one of the biggest factors in your retirement saving success is just getting started. When you begin a new job, find out when you’re eligible to enroll in the organization’s retirement plan. While it can be easier said than done if you’re tackling a number of other financial priorities—from everyday bills to credit card and student loan debt—it really pays to save as soon as possible.

That’s because the earlier you start saving, the more time your money has to potentially grow in line with the markets. More than that, you can potentially benefit from the power of compounding, or earning interest on your interest and investment gains on your investment gains.

For this reason, the sooner you start saving, the less you may need to contribute to your retirement account(s) over the course of your career to achieve the returns you want. Someone who begins saving for retirement in their 20s may be able to get away with socking away a small percentage of their annual income, while someone who waits until their 40s may need to put aside significantly more.

Choose an Appropriate Savings Target—and Capture Any Matching Dollars

To that end, saving at a sufficient rate can help you meet your retirement goals. One place to start is by saving at the rate required to take advantage of any matching dollars offered by your employer. The employer match is tantamount to getting paid to save. The caveat is that there are sometimes vesting parameters attached to the match; for example, you may not be eligible to get it unless you’ve worked at the company for a few years, or you may forfeit it if you leave the company before a specified amount of time. The rules governing the structure and eligibility for matches vary from company to company.

But the reality is that the match percentage will likely be too low to get you to your savings target, as many employers set it around 3-6 percent. Even if you start small, you might want to increase your contribution level at regular intervals, such as your work anniversary, and to steer a portion of your raises and bonuses into your account.

Setting Up Your Account: TDF vs. DIY vs. Managed Account

At some organizations, you may be automatically enrolled into the retirement plan once you meet certain criteria, such as working there for a certain amount of time. At other companies, you may need to fill out paperwork to enroll on your own. Your benefits coordinator will be able to provide those details.

When opening a 401(k) or 403(b), you’ll likely need to decide where the money you’re contributing to it will be invested. The exception would be if your employer automatically enrolls you into something called a target-date fund, or TDF. This is a fund tied to your anticipated year of retirement, which adjusts its mix of assets—like stocks, bonds and cash—over time. The idea behind these funds is to invest in securities with both higher risk and higher reward potential earlier on in your career when your portfolio has time to cover from market fluctuations, and to gradually move towards less risky fixed income investments as you get closer to retirement.

Note that you do not have to be automatically enrolled to use a TDF—you can generally also select this option for yourself.

Speaking of doing things for yourself, you will often have the option to select your own mix of investments for your retirement account. If you’re a savvy investor and feel confident in picking securities that can meet your objectives, you would choose from among your plan’s menu of options and designate the percentage of your contributions you’d like to allocate to each one. This tactic gives you an opportunity to be discerning about the fees you’re paying for each investment and can offer more flexibility than a TDF, which only takes your age into account. The flip side is that the onus is on you to make important decisions that will ultimately impact your financial future.

Another option is to work with a financial professional as part of a managed account service, if this is offered as part of your plan. A Financial Advisor or planner would evaluate your situation and goals to arrive at a strategy tailored to your needs. These services are becoming more popular but are not available with all plans. The way your assets are allocated will be another one of the most important determining factors in meeting your goals, so getting help in some form can be a wise idea.

The Bottom Line

Setting up your retirement portfolio will be one of the biggest steps you’ll take in preparing for your financial future. Starting early, saving at a sufficient rate and choosing your assets wisely—whether on your own, with the help of a professional, or through an out-of-the-box solution like a TDF—are some of the keys to getting on the right path.