Planning for retirement can feel overwhelming, but it doesn’t have to be.

Whether you’re dreaming of early retirement or just want to make sure your golden years are stress-free, setting up your portfolio right is the first step.

We’ll break it down in a simple, step-by-step way.

Step 1: Keep a Cash Cushion for Peace of Mind

Imagine starting each year knowing you’ve got a “rainy day” fund.

Before you even think about risky investments, stash away enough cash to cover one year’s expenses.

This isn’t about high returns and whatnot, it’s about having quick access to funds when you need them without worrying about market fluctuations.

Use safe, liquid options like a high-yield savings account or money market fund to keep this cash handy.

Step 2: Build a Short-Term Safety Net

Next up, consider creating a reserve that covers about 2 to 4 years of living expenses.

This fund is your buffer against market downturns. Instead of letting this money sit idle, invest it in lower-risk assets such as short-term bonds or CDs.

By doing so, you can earn a modest return while still keeping your money relatively secure, ready to be drawn upon if needed.

Step 3: Invest in the Long Haul

Since your immediate needs are covered, it’s time to focus on growth. This is where you allocate the majority of your portfolio.

A balanced mix of stocks and bonds can help ensure your savings not only keep pace with inflation but also grow over time.

Here’s a rough idea of how you might adjust your mix as you age:

• Early Retirement (60s): Consider a more growth-oriented strategy. Use around 60% for stocks, 35% for bonds, and 5% cash reserve.
• Mid-Retirement (70s): As you get older, gradually shift towards more stability. Maybe 40% stocks, 50% bonds, and 10% cash.
• Later Years (80+): Focus more on preserving your hard-earned capital. Focus on 20% investment in stocks, 50% in bonds, and 30% in cash.

These rules are not set in stone. They are a flexible roadmap to help guide you based on your personal risk tolerance and income needs.

Why Bother with Stocks in Retirement?

It might seem counterintuitive to hold onto stocks if you’re worried about market swings.

However, stocks are vital because they offer growth potential, which is something essential to keeping up with inflation over the long term.

Without some stock exposure, you risk your portfolio losing purchasing power as prices rise.

Here’s a Quick Recap

• Keep one year’s worth of expenses in an easily accessible account.
• Build a safety net of 2-4 years’ expenses using low-risk investments.
• Invest the rest in a diversified mix that evolves with your age and risk tolerance.

Maintain enough growth assets to beat inflation, but adjust your mix as you near your retirement to protect your savings.