How to build a top-tier retirement portfolio without the headache

Here's why retirement investing can be far more simple than you'd think.

| More on:
Smiling elderly couple looking at their superannuation account, symbolising retirement.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Our retirement years are supposed to be bliss-filled and relaxing, perhaps spent indulging in long walks on the beach and gazing at sunsets from a hammock. Financial headaches and agonising over funding a comfortable retirement, however, are probably not part of most people's retirement dreams.

Yet that's what the investing process can bring to the table. After all, losing a primary, active source of income that has sustained one over a decades-long working career is a big change. And one that can spark a lot of mental and financial stress, especially if you're into picking individual shares as an investor.

After all, one wrong call can be seriously detrimental to your golden years' nest egg, with no active source of income to pick up the slack.

Yet it doesn't have to be this way. I think investing in retirement can be relatively stress-free. All you have to do is pick passive, bottom-drawer investments that allow no room for human error.

Yes, the stock market can be, and is, volatile. Volatility can be particularly disconcerting for investors who have already retired.

But history tells us that the S&P/ASX 200 Index (ASX: XJO) goes up far more often than it goes down. It also tells us that the ASX 200 has never failed to exceed a previous all-time high.

It's these facts that retirees should keep at the forefront of their minds when building a retirement portfolio.

Using index funds to build a comfortable retirement

So I think the best way to build out such a portfolio is by using index funds. Index funds track entire markets, and are a great alternative to picking individual shares yourself.

For example, an ASX 200 index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ) holds 200 of the largest shares on the ASX, all in one investment. That's everything from the big four banks to the likes of BHP Group Ltd (ASX: BHP), Telstra Group Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW) and Harvey Norman Holdings Limited (ASX: HVN).

Because an index fund like IOZ holds so many shares, the risks of holding each individual company are highly diluted. This means that, unlike an individual share, the risk of losing all of your capital in one investment is almost zero. The entire Australian economy would have to completely implode for this to happen. If that indeed does come to pass, well, we're all up the proverbial creek with no paddles anyway.

Thus, if I were retiring tomorrow, I would certainly use an ASX index fund like IOZ as the foundation of my retirement portfolio. For one, ASX 200 index funds returned an average of around 7.3% per annum over the past ten years (in IOZ's case anyway).

But they also give investors significant passive income in the form of dividends on the side, as well as a generous stream of franking credits. To illustrate, the iShares ASX 200 ETF currently has a trailing dividend distribution yield of 4.03%.

Diversifying your nest egg

Personally, I would be happy with having at least 50% of my retirement nest egg in an ASX 200 exchange-traded fund (ETF), or similar investment. A fund like IOZ offers both capital growth potential and generous and franked dividend income, if history is anything to go by.

But I would also supplement this retirement portfolio foundation with other ASX ETFs too. Another option might be a dividend-focused ETF, such as the Vanguard Australian Shares High Yield ETF (ASX: VHY). This fund holds a smaller portfolio of ASX shares but prioritises large, fully-franked income payers.

I would also think about adding some international exposure to my retirement portfolio. International shares typically offer less income potential than ASX shares, and you can forget about franking. But they more than make up for this with their capital growth potential.

To illustrate, an American-focused index fund like the iShares S&P 500 ETF (ASX: IVV) offers exposure to some of the world's best companies, including Apple, Google-owner Alphabet, Mastercard, Coca-Cola and McDonald's.

Why not add stakes in names like those in your nest egg?

So all in all, I think index funds can really take much of the headache out of planning for a comfortable retirement.

If you're great at stock picking and want to continue your successful investing track record in retirement, then don't listen to me. But for most retirees who just want to forget about share market volatility and stick with bottom-drawer, passive investing, I think the above approach will suit you down to the ground.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Alphabet, Apple, Coca-Cola, Mastercard, McDonald's and Telstra Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Apple, Harvey Norman, and Mastercard. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $47.50 calls on Coca-Cola, long January 2025 $370 calls on Mastercard, and short January 2025 $380 calls on Mastercard. The Motley Fool Australia has positions in and has recommended Harvey Norman and Telstra Group. The Motley Fool Australia has recommended Alphabet, Apple, Mastercard, Vanguard Australian Shares High Yield ETF, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Retirement

a mature aged couple dance together in their kitchen while they are preparing food in a joyful scene as the Breville share price rises on the back of a 25% profit surge
Retirement

Retirement income: 3 Australian dividend stocks to own for decades

Analysts think these shares could be good picks for retirees.

Read more »

Couple holding a piggy bank, symbolising superannuation.
Retirement

Is $500,000 enough to retire in Australia? Here's what the numbers say

Let's see where half a million would get you when it comes time to retire.

Read more »

An older couple use a calculator to work out what money they have to spend.
Retirement

Changes to deeming rate thresholds may boost your pension from tomorrow

The thresholds used to calculate deemed income from financial assets are going up. Here is the impact.

Read more »

Two people smiling at each other while running.
Retirement

From next week you can earn and own more while still qualifying for the age pension

The latest changes to the pension assets and income tests will come into effect on Tuesday.

Read more »

Joyful woman at a beach on the Gold Coast with her arms spread out.
Retirement

Aged 30 and earning an average wage? You're now set up for retirement. Here's how

A 30-year-old earning $75,000 per year for life will have enough for a comfortable retirement after 1 July.

Read more »

Two retirees looking through a window.
Retirement

Here's how much retirement costs per year if you're renting

The Australian Retirement Standard has introduced a living costs guide for retirees who rent their homes.

Read more »

Couple holding a piggy bank, symbolising superannuation.
Retirement

Passive income in retirement: Where to invest now

Here are three options for retirees to consider when building a retirement portfolio.

Read more »

A senior couple sets at a table looking at documents as a professional looking woman sits alongside them as if giving retirement and investing advice.
Retirement

Here's how much a comfortable retirement costs per year

The Retirement Standard has just been updated. Here are the new numbers for annual living costs.

Read more »