By Dana Anspach via

When working and saving, the goal of your retirement portfolio is to earn as high a rate of return as you can while not taking so much risk that it will scare you into pulling out of the market during a downturn.

Once retired, the goal changes. A different goal means a different portfolio. A retirement portfolio needs to produce reliable cash flows that last the rest of your life regardless of the variety of market conditions that occur over your retirement years. There are four primary ways you can construct such portfolios, and of course, numerous variations of each.

1. Total Return

With a total return retirement portfolio, you pick a mix of stock and bond index funds (or individual stocks and bonds) that you expect will deliver your desired average return over time. For example, you might look at the historical returns of a portfolio that is about 60% equity index funds and 40% bond funds and conclude that you expect to earn an average return of about 7% a year. Based on the 4% withdrawal rule, you might estimate you could withdraw 4% a year and continue to watch your portfolio grow. You would withdraw 4% of the starting portfolio value each year regardless of the actual account performance that year. (Note Vanguard’s model portfolio allocations show a gross average annual return of 8.7% for a 60% stock/40% bond portfolio from 1926 – 2016).

This type of withdrawal plan is referred to as “systematic withdrawals.” When using this approach, the growth portion of your portfolio should consist of multiple equity asset classes including U.S large-cap growth and value, U.S. mid-cap growth and value, U.S. small-cap growth and value, international large-cap, international small-cap, emerging markets, and depending on the time frame of the portfolio sometimes real estate and commodities. Adding real estate and commodities may help reduce the one-year volatility of a portfolio, but may not contribute much to your outcome if your holding period is seven years or more.

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