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Building a Diversified Retirement Portfolio for Your Golden Years

Creating a diversified retirement portfolio will help you save more money over the years while adding a layer of stability to your life.

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.

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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.

Having a tax-smart, diversified retirement portfolio 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 your original contribution), 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 less of a 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.

401(k)s and traditional IRAs are not ideal wealth transfer tools due to their tax status and the possibility of required minimum distributions, and it may be worth considering Roth conversions as a means of pre-paying the tax liability on inheritable assets.

What is most important when it comes to managing assets that you plan to leave behind is a clear and well-crafted will or estate plan. While it may be inconvenient for a beneficiary to take distributions and then owe taxes on them, that pales in comparison to the headache that disputes around an estate can bring.

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?

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*This post has been updated from a version originally published in 2021.

Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry. She has created and/or written numerous investment publications, including UnDiscovered Stocks, UnTapped Opportunities, and Nancy Zambell’s Buried Treasures under $10. Nancy has worked with MoneyShow.com for many years as an editor and interviewer for their on-site video studios.