Retirement Portfolio Investing Strategies To Know (2024)

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Ready to get serious about funding your retirement? Here's a look at the importance of retirement investing plus four strategies that could ultimately pay the bills in your senior years.

The Importance Of Retirement Investing

Retirement investing is the process of buying assets that can provide income once you leave the workforce. Retirement income can take the form of interest payments, dividend payments or stock liquidations that fund account withdrawals.

You need to learn how to invest for retirement because:

Cash deposits don't grow quickly enough to amass sufficient wealth for retirement.
Social Security, on average, only replaces 40% of working income.
It's common for seniors to be pushed out of the workforce earlier than planned due to health issues or employers' changing needs.

In other words, cash savings, Social Security and working indefinitely are not realistic retirement plans. You'll have far greater success by investing regularly for 20 years or more during your working years.

Key Points

Income investing is a conservative approach that produces regular cash income but minimal-to-no capital appreciation.
Dividend investing splits your returns between income and capital appreciation.
Value investing involves choosing stocks that are currently underpriced or out of favor, on the assumption that their market value will rise later.
Growth investing favors stocks that are poised to outperform the market in the coming months and years.
Most savers will benefit from combining these investing strategies into one diversified retirement portfolio.

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Retirement Investing Strategies To Know

Below is a look at four top retirement investing strategies: income investing, dividend investing, value investing and growth investing. They are ordered from least to most aggressive.

Retirement Investing Strategy #1: Income Investing

Income investing is the process of buying securities that produce cash income but offer little-to-no capital appreciation.

As a refresher, capital appreciation is a gain in value over time—as in when a stock you buy for $100 is later worth $400. To benefit from that appreciation, you'd sell some or all your shares.

Income investing doesn't require as much liquidation because the assets generate regular payments. You may still need to liquidate assets periodically if your retirement portfolio doesn't produce enough income to fund your retirement living expenses.

Note that without appreciation, contributions alone won't be enough to grow your income portfolio sufficiently. For that reason, you must reinvest the income while you're working. Otherwise, you'll struggle to amass enough assets to satisfy your income needs.

Retirement Investing Strategy #2: Dividend Investing

Dividend stocks are a hybrid strategy of sorts because they deliver capital appreciation and income. Generally, it's easier to amass a big portfolio over 10 or 20 years with retirement investments that appreciate vs. those that don't.

The downside is that appreciation potential comes with added risk. An economic or industry downturn or poor results at specific companies can lower the value of your dividend stocks. Economic or industry-specific issues tend to create temporary value losses, while problems at the company can cause temporary or permanent stock price declines.

As with pure income investing, it's best practice to reinvest the dividends until you retire. This expedites the growth of your portfolio.

Asset Types For Dividend Portfolios

You can mix and match different types of dividend stocks to optimize your portfolio risk and overall dividend yield. Options to consider are:

Dividend Aristocrats: These are S&P 500 stocks that have raised their dividends annually for the last 25 consecutive years. Coca-Cola KO and Walmart WMT are examples.
Blue-Chip Dividend Stocks: Large, well-established companies with low volatility and stable dividends. JPMorgan (JPM) and Target TGT are examples.
Growth Dividend Stocks: Deliver stronger appreciation potential plus a modest dividend payment. Microsoft MSFT and Nvidia (NVDA) are examples. These stocks pay yields of 0.76% and 0.03%, respectively.
High-Yield Dividend Stocks: Pay out more income for your investment dollar. The trade off is that these stocks may be less reliable with their dividend payments or more volatile in terms of stock price. Examples include AT&T (T) and KeyCorp KEY , which have yields of 7.1% and 7.3%, respectively.

[Note: Forbes has a premium investment newsletter, Forbes Dividend Investor, that recommends 25 dividend stocks with strong fundamentals.]

Retirement Investing Strategy #3: Value Investing

Value investing involves choosing stocks that are underpriced relative to their income potential and financial strength.

You can identify value stocks through analysis of financial metrics and business conditions. They tend to have strong performance outlooks, steadily rising cash flow and low P/E, P/B and P/S ratios.

Value stocks are usually less volatile than growth stocks. Many pay dividends, too. They do require a longer holding period, however. It can take time for the stock price to rebound to where it should be.

Retirement Investing Strategy #4: Growth Investing

Growth investors buy stocks that are positioned to outperform peers and the market. Growth stocks don't typically pay dividends because they're reinvesting excess cash into strategic initiatives.

To build a growth portfolio, you'd invest in diversified stocks that have strong growth characteristics. These include a track record of revenue and earnings increases, aggressive future growth targets, loyal customers plus a large and growing addressable market.

You can diversify by holding 20 to 25 individual stocks that represent different industries, geographies and company sizes. Or you can buy mutual or exchange-traded funds that invest in growth stocks.

Growth stocks can be volatile, but the risk of loss moderates somewhat with longer holding periods.

Asset Types For Growth Portfolios

There are many types of growth stocks, including:

Small- and mid-caps: These companies have more room to grow than mega cap players like Apple AAPL . They can appreciate quickly but also can be quite reactive to macroeconomic trends.
Emerging market stocks: Emerging markets are economies that are transitioning to more mature, developed states. These economies can exhibit rapid growth and expansion as well as extreme volatility.
Disruptive technology stocks: These companies invest and develop technologies that transform existing industries or markets. Tesla TSLA (TSLA) is an example. The electric vehicle (EV) maker has forever changed the century-old automotive industry.
Established growth stocks: These stocks blend the best of both worlds: solid growth prospects with financial strength. Alphabet (GOOGL) and Amazon AMZN are examples.

What Is The Best Strategy For Retirement?

How to invest for retirement? There's no single answer. Most investors will benefit from having some level of exposure to all the investing strategies outlined here. The retirement portfolio allocations you use to blend income assets with dividend stocks, value stocks and growth stocks depends on your timeline, risk tolerance, savings goals and even the types of investment accounts you use.

Say you are targeting a $2.5 million account balance by 2038. That demands a more aggressive, stock-heavy strategy than, say, someone who's targeting $1.5 million by 2045. Or perhaps you are investing for retirement in a taxable account. In that case, you'd avoid income-producing assets to avoid triggering a tax bill and lean in on growth stocks.

You can also modify your retirement portfolio by age, as your needs change. Many savers will invest aggressively when retirement is decades away. As retirement nears, they shift into a strategy that preserves the wealth they've created.

Keep in mind that the initial steps for building your retirement portfolio are the same, no matter what strategy you choose. Those steps are:

Determine income needs: Retirement experts say to assume you'll need 80% to 90% of your income to cover living expenses once you stop working.
Define your risk tolerance: Higher risk assets have the most potential. Lower risk assets generally have lower income or growth characteristics.
Choose appropriate asset types: Consider your timeline, risk tolerance, savings goals and tax needs. Additionally, think about how much work you want to take on. If you prefer to be hands-on, you'd opt for individual positions. If you want to keep things low-maintenance, a mutual fund portfolio or an index fund portfolio will suit you better.
Target a 15% contribution rate. Many experts recommend investing 15% or more of your income for retirement: Think of it this way: The more you contribute in your working years, the less worry you'll have later on.

Bottom Line

Your retirement portfolio allocations can position you for income, capital appreciation or both. An income strategy prioritizes bonds, which don't grow in value but should produce reliable cash flow. An appreciation strategy relies heavily on stocks which can be volatile.

Fortunately, this isn't a black-and-white choice. You can take a blended approach or modify your strategy later as you learn more about your own retirement investment preferences.

What you can't do is make up for time you stayed out of the market. So start investing today, monitor your progress and adjust as needed. Those steps will put you firmly on the path towards a comfortable, well-funded retirement.