Have you developed a diversified retirement portfolio yet? If you have heard anything about investing, you’ve probably heard about the importance of diversification. Unfortunately, that’s about as far as the conversation usually goes. People don’t often talk about the details or what kind of investment vehicles are suitable for which purposes.
The idea of diversification is that you should have different investments operating in different ways. Some should be more aggressive, some should be more conservative, and some in between the two. Still, only talking about the potential for growth or safety of investments is a limited view to take.
Investments serve many more purposes than just growing or preserving wealth as safe money. That means there are plenty more ways to diversify than just thinking about how aggressive investments are. Thinking about the different ways to diversify begins to transform how you prepare for retirement and your entire financial life.
Three recommendations for building a diversified retirement portfolio
How do we create a diversified retirement portfolio? There isn’t just one answer. Diversification is more about getting a lot of different things working in your favor.
1. Tax diversification
Taxes change, and your tax bracket is also likely to change. It is hard to say for sure, but with taxes near all-time lows, the likelihood is that you will be paying more in taxes in the future than you are right now. Many investment vehicles are tax-deferred vehicles, which is excellent for growth and means the money will be taxed when you take it out in the future. When people don’t understand this, they deceive themselves into thinking they have more money than they do.
Diversifying the way your money is taxed can give you more options in the future. By having money you can take from a tax-free vehicle (which really only means that you’ve already paid taxes on everything in it), you can manage what your income looks like in the future and possibly keep yourself in a lower tax bracket.
2. Diversification of liquidity
You can get money for your gold a lot faster than you can for your used car. Not to mention one of the two will hold its value much better. The same is true across many different asset classes and investment vehicles.
You need to be aware of which assets you can turn into cash quickly and easily in the case of an emergency or an investment opportunity. Investment vehicles such as 401(k)s and IRAs are great for growth and for building a diversified retirement portfolio, but they severely limit access to your money and will penalize you if you try to take your money out too soon. Having liquidity elsewhere will ensure that you never need to worry about taking money from your growth vehicles.
3. Passing wealth with a diversified retirement portfolio
The truth is, when you are thinking about who is inheriting your wealth, this is a place where diversification is not your priority. You want every dollar that you are passing on to be moved in the most efficient ways so that your heirs get everything they deserve.
One way or the other, some of your assets are not great vehicles to pass wealth. For example, 401(k)s and IRAs are not known as the best means of inheritance. The essential aspect of the diversification of this category is two-fold.
One, make sure you do everything you can to legally dictate where you want all your assets going when you pass. This will remove the potential for disputes with your heirs that can cost everyone time, money, and stress.
Two, if you feel you need to, also dictate how assets are given. In many cases, you can control the distribution of assets to know they will be invested wisely or distributed over a longer time. This can be important to make sure your money is used effectively.
There is no shortage of things to consider for saving money, retirement, and afterward. None of these aspects has one angle to them, and that is the real importance of diversification. Look at things from all angles possible.
What investment vehicles do you use, or will you use in a diversified retirement portfolio?