Retirement Planning: Steps to build a stable retirement income

Updated: June 18, 2021 9:23 AM

Create a retirement income by constructing a portfolio of stock and bond index funds such that you get a return of 7-10%

You should build the portfolio such that you get a return of around 7-10%.You should build the portfolio such that you get a return of around 7-10%.

By Rachit Chawla

One of the main reasons behind investing is to ensure a secure, financially stress-free retired life. While doing so, it is extremely important to find the right balance between investment risk and return.

Build a total return portfolio

In a total return portfolio, you invest money in different schemes to target a 10 to 20-year average annual return. You can split your investments among stocks, bonds, and cash. One common way to create retirement income is to construct a portfolio of stock and bond index funds. You should build the portfolio such that you get a return of around 7-10%.

Invest in bonds

There are two types of bonds—high-yield bonds and low-yield bonds. While high-yield bonds offer higher returns at a higher risk, low-yield bonds offer relatively lower returns but at a lower risk. Depending upon your risk appetite, you can invest in different types of bonds. As a rule of thumb though, it’s best to diversify your portfolio between high-yield and low-yield bonds as per your risk-bearing ability.

For retirement, individual bonds can be used to form a bond ladder. This strategy uses the maturity dates of bonds to match your financial needs at any given time. This investment structure is often referred to as asset-liability matching or time-segmentation. The idea behind forming a bond ladder is to hold the bonds until they mature. Buy bonds either for generating an income source or for getting the guaranteed principal at maturity.

Purchase rental real estate

If you buy a real estate property and put it on rent, you can generate a stable income source that’ll support you once you’ve retired. This is all about creating a stable income stream, not about making a quick buck. Also, before you buy a property, you should consider all the potential costs such as maintenance that you may have to bear.

Mutual funds

Buying individual stocks that pay dividends is a great way to generate steady income. However, to do this by yourself, you need to have a thorough knowledge of the stock market.

If you are an amateur, then it is better to invest in a mutual fund scheme. Make sure to study the track record of the fund before investing and also ensure that your personal goals align with those of the fund.

The writer is CEO & founder, Finway FSC

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