Diversify retirement Portfolio how to

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Primer on diversifying your retirement Portfolio

The ideal diversified retirement Portfolio sits on top of a solid financial foundation built with these pillars:

  • Enough life insurance to pay off all outstanding debt, including mortgage(s)
  • Enough liquid savings to cover six months worth of living expenses
  • Regular savings for vacations, hobbies, and fun activities

When your personal financial picture looks something like the image below you can enjoy life while allowing your retirement savings to grow over the long-term. 

Within your retirement Portfolio there are three categories of Investments:

  • Tax-deferred: pre-tax income contributed to IRS-approved accounts like 401K, 403b, 457, TSP, annuities, whole life insurance, etc. - you will pay taxes on this money when you take distributions in retirement - capital gains are taxed as income
  • Tax-exempt: after-tax income contributed to IRS-approved accounts like Roth IRA, municipal bonds, indexed universal life insurance, etc. - taxes have already been paid on this money so no taxes are due when it is distributed - capital gains are tax-free
  • Non-tax-advantaged: purchased with after-tax income invested outside any tax-preferred account - taxes will be due on this money when you sell the Investment - capital gains will be taxed as capital gains in the year of the sale

Tax-deferred

Taxed at distribution

Assets not taxed in the year sold *

Capital gains taxed as income

Tax-exempt

Not taxed at distribution

Assets not taxed in the year sold *

Capital gains are tax-free

Non-tax-advantaged

Distributions aren't a factor

Assets are taxed in the year sold *

Capital gains are taxed as capital gains

~

* Active investors can buy and sell securities and even real estate inside tax-advantaged accounts like self-directed IRAs. No capital gains are paid in the year of the sale so 100% of the gains can be re-invested. In contrast, when Investments are sold outside of tax-advantaged accounts, capital gains are due in the year the sale occurs.

Investment category

Taxed at distribution

Taxed when sold *

Capital gains

Tax-deferred

Yes

No

Taxed as income

Tax-exempt

No

No

Tax free

Non-tax-advantaged

n/a

Yes

Taxed as capital gains

* Active investors can buy and sell securities and even real estate inside tax-advantaged accounts like self-directed IRAs. No capital gains are paid in the year of the sale so 100% of the gains can be re-invested. In contrast, when Investments are sold outside of tax-advantaged accounts, capital gains are due in the year the sale occurs.

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Retirement Portfolio models

There are a few retirement Portfolio models that investors commonly adopt:

  1. Guaranteed outcome
  2. Interest income
  3. Simple
  4. Diversified
  5. Hope and pray (that Social Security will be enough)

Guaranteed outcome

In the guaranteed outcome retirement Portfolio the investor chooses Investment vehicles that have fixed returns. This strategy trades the potential for higher Investment returns in favor of the safety and security provided by a guaranteed outcome.

Typical Investments in the guaranteed outcome category are bond ladders (investor buys a bond that matures in each year of retirement), annuities, and CDs.

Interest income

The interest income retirement Portfolio model focuses on Investments that provide income in the form of interest and dividends. Like the guaranteed outcome model, this strategy favors financial security over the potential for higher returns in riskier Investments.

Common vehicles in this category are CDs, government bonds, AA-rated and higher corporate and municipal bonds, and select dividend stocks.

Simple

In the simple Portfolio model the investor allocates funds to three categories of Investments: stocks (growth), bonds (income), and emerging markets (aggressive growth). The percentage of Portfolio funds allocated to each category changes based on the investor's age and tolerance for risk.

Mutual funds and ETFs are commonly used to setup a simple retirement Portfolio. Some of the large Investment management companies suggest simple Portfolios using just three of their Mutual funds.

An important point to understand about this Portfolio model is that the components of emerging market Mutual funds and ETFs are typically stocks and bonds from international markets. 

Some Financial planners will suggest that the emerging market exposure provides diversification for the overall Portfolio but notice that the simple Portfolio model only consists of two asset classes: stocks and bonds.

Also notice that both of these asset classes are 'paper' meaning they aren't backed by anything tangible. From this perspective the simple retirement Portfolio only consists of one asset class: paper. 

Diversified

A diversified Investment Portfolio includes exposure to stocks and bonds while adding in alternative asset classes like Precious metals and rental real estate.

The objective is to create a Portfolio that is more resilient to changing market dynamics over time. Gold and Silver, for example, are alternative Investments that often perform well when stock markets are suffering or the broad economy is dealing with the ravages of Inflation.

Some Financial planners suggest that a Precious metals allocation of just 5 or 10% of the overall Portfolio can serve as an insurance policy for the other Investments.

Residential rental properties provide the potential for income, capital gains, and tax advantages. Purchasing rental real estate inside a self-directed IRA allows an investor to double-up on tax bennies. If the income property is located in a Qualified Opportunity Zone (QOZ) there may be additional tax benefits.

Hope and pray

Hope and pray (that Social Security is enough) is not a recommended strategy for retirement planning, obviously, but that is the unfortunate reality for most Americans these days. With the rising cost of living and stagnant wages, most adults are essentially living paycheck-to-paycheck with a very thin margin of financial safety. There is very little, if any, money available for retirement savings.

Some studies suggest that many American families are 90 days away from bankruptcy and six months away from being homeless if the primary income-earner were to lose their job.

In all likelihood, you are not following the hope and pray strategy or you wouldn't be reading this material. Kudos to you for taking a proactive approach to your retirement savings plan. With just a little bit of knowledge and some strategic planning you can make a significant difference in your long-term Investment results. 

The image below depicts how a mix of tax-deferred, tax-exempt, and non-tax-advantaged Investment funds are used to implement a simple retirement savings plan.

In a diversified Portfolio we reduce the allocation to stocks and bonds while introducing alternative asset classes like real estate and Precious metals.

Retirement Portfolio allocation

There are several layers involved in retirement Portfolio allocation.

Tax treatment

At the highest level you will allocate funds among the three Investment categories discussed above: tax-deferred, tax-exempt, and non-tax-advantaged.

There may be Portfolio constraints that arise at this level of planning as you attempt to maximize tax-advantaged retirement savings.

For example, there may be years when income isn't large enough to provide for savings in both the tax-exempt (after-tax) and non-tax-advantaged categories. Taking advantage of employer-provided tax-deferred retirement savings plans (401K, etc.) may be all that is possible. 

When employer-provided matching programs are available it makes sense to take advantage of them to the fullest extent possible. For example, if an employer is offering to match 2% of an employee's salary in 401K contributions, it is hard to justify not taking advantage of that offer regardless of how tight cashflow might be at the time.

Your primary objective at this level of planning is to determine the amount of money available for retirement savings and to get a sense for how that money is (or will be) allocated between tax-deferred, tax-exempt, and non-tax-advantaged Investments.

Mix of asset classes

Your second layer of planning involves allocating funds into specific asset classes like stocks, bonds, Precious metals, and real estate.

In simple Portfolio models there are only two asset classes involved: stocks and bonds. When the investor is young and more tolerant of risk the Portfolio is weighted towards growth over safety (e.g., 65% stocks and 35% bonds). As the investor ages this simple Portfolio model shifts to favor safety over growth (e.g., 35% stocks and 65% bonds).

When you add alternative asset classes like real estate and Precious metals to your Portfolio, planning becomes more interesting because you have greater freedom to express personal preferences. For example, an investor who likes real estate may weight their overall retirement Portfolio towards rental property instead of stocks and bonds. "Gold bugs" may favor the Precious metals and plan their retirement savings accordingly.

Gold bug

A person who expounds on the virtues of Gold and Silver as the only asset classes on planet Earth satisfying all of the characteristics of "money": durability, portability, divisibility, uniformity, limited supply, and acceptability.

While the Gold bug might weight their retirement Portfolio 65% Precious metals, 25% stocks and 10% bonds, the real estate buff might choose to allocate 65% of their retirement savings towards purchasing rental property.

After considering how your personal preferences affect your overall Portfolio you can dive into the next layer of planning. The image below expands on the Precious metals segment of a Portfolio.

The next layer for Stock planning would involve dividing funds between large-, mid-, and small-cap shares based on your Investment goals and tolerance for risk.

How to diversify stock Portfolio

Because most retirement plans are based on the simple Portfolio model containing only stocks and bonds, a common question that investors ask is how to diversify a stock Portfolio.

At Satori Traders our answer to that question always includes Silver and Gold. When it is appropriate, we also recommend income-producing residential real estate.

Self-directed IRAs provide a tax-advantaged vehicle for owning both of these alternative Investments.

Conservative investors wanting to increase the safety and stability of their Portfolio may achieve all of their Investment objectives by simply transferring 5 or 10% of their overall Portfolio value into a Precious metals IRA.

If the objective is to flee traditional Investments because Stocks and bonds are part of the 'everything bubble' created by the rampant printing of fiat currencies, then more aggressive diversification is needed.

Fortunately, the IRS is pretty good about letting you move your tax-advantaged Investment funds around without suffering tax consequences (as long as you follow the rules).

Since the Taxpayers Relief Act of 1997 self-directed IRAs have provided a safe haven for investors wanting to convert paper securities (stocks and bonds) into tangible assets inside their tax-favored retirement accounts. Using self-directed Traditional and Roth IRAs it is technically possible to move 100% of existing retirement savings out of paper assets and into tangible goods.

As always, do your own due diligence before making any Investment decisions. Consult with your personal Financial planner, Investment advisor, and tax professional before altering your current retirement savings plan. These specialists can make recommendations appropriate for your unique circumstances and tolerance for risk.

The image below shows where a Gold IRA fits within the Precious metals segment of a diversified Portfolio model.

Notice that the Foundation consists of physical Silver and Gold purchased with non-tax-advantaged funds. This metal is stored locally in a commercial vaulting facility or perhaps buried in farmer Joe's back 40 under the old elm tree ('nuf said).

Once the Foundation is in place the rest of the Precious metals Portfolio can be constructed with either tax-deferred, tax-exempt, or non-tax-advantaged funds. Notice that Gold IRAs can be purchased with either tax-deferred or tax-exempt funds.

Physical metal, stored locally

Purchase with non-tax-advantaged funds

Physical metal, stored remotely

Purchase with non-tax-advantaged, tax-deferred, or tax-exempt funds

Precious metals securities

Purchase with non-tax-advantaged, tax-deferred, or tax-exempt funds

Simple retirement Portfolio

As discussed above, the simple retirement Portfolio model involves a mix of stocks and bonds that varies over time based on the investor's risk tolerance and age.

Most of the major Investment management companies make it easy to implement a simple Portfolio using just a few Mutual funds or ETFs.

Vanguard for example offers the Total Stock Market, Total International Stock, and Total Bond Market Mutual funds. Investors can allocate their retirement savings to a mix of these three funds and be done with their Investment decisions.

When the time is right, a simple retirement savings Portfolio can be converted into a diversified retirement Portfolio with just a few changes.

Diversify Portfolio using Gold IRA

One easy way to diversify your Portfolio is to open a Gold IRA and move some of your retirement savings into physical Precious metals.

At distribution time you can either convert the Silver and Gold back to cash or have the Custodian discreetly mail you the physical metal.

The physical Silver and Gold can be passed-on to your beneficiaries (following the relevant IRS guidelines for inheritance and gifting, of course).

Gold IRA

A self-directed IRA where a third-party Custodian holds physical Precious metals on the behalf of the investor. Also known as "Silver IRAs" and "Precious metals IRAs".

There are Traditional Gold IRAs for tax-deferred money and Roth Gold IRAs for tax-exempt money.

As long as the tax category (tax-deferred vs tax-exempt) is maintained, existing retirement funds can be moved into a Gold IRA without incurring any tax consequences.

Most IRS-approved retirement accounts are eligible for a Gold IRA rollover including 401K, 403b, 457, TSP, Traditional / Roth / SEP IRA, annuities, and pension plans. 

The Gold IRA companies all provide knowledgeable representatives who can help you answer specific questions.

These representatives are also salespeople so understand that they will try to motivate you towards taking immediate action when you call.

Refer to the Gold IRA page on the website for tips on selecting the best Gold IRA to meet your specific Investment objectives.

You can learn more about Precious metals IRAs by following the links below and requesting the Gold IRA companies' free information kits.

Precious metals IRA company

Fidelity

  • Founded: 1946
  • BBB rating: C-
  • Proof Coins: No
  • Minimum Investment: $1,000

Patriot Gold Group

  • Founded: 1990
  • BBB rating: A+
  • Proof Coins: Yes
  • Minimum Investment: $15,000

Birch Gold

  • Founded: 2003
  • BBB rating: A+
  • Proof Coins: Yes
  • Minimum Investment: $10,000

Goldco

  • Founded: 2006
  • BBB rating: A+
  • Proof Coins: Yes
  • Minimum Investment: $25,000

Regal Assets

  • Founded: 2010
  • BBB rating: unrated
  • Proof Coins: Yes
  • Minimum Investment: $10,000

Noble Gold

  • Founded: 2017
  • BBB rating: A-
  • Proof Coins: Yes
  • Minimum Investment: $2,000

Gold IRA

Year founded

BBB rating

Proof Coins

Minimum Investment

Fidelity

1946

C-

No

$1,000

Patriot Gold Group

1990

A+

Yes

$15,000

2003

A+

Yes

$10,000

2006

A+

Yes

$25,000

2010

unrated

Yes

$10,000

Noble Gold

2017

A-

Yes

$2,000

Retirement Portfolio examples

The retirement Portfolio examples below focus on specific Investment vehicles you might choose to meet your investing goals.

How you mix these products for your ideal Portfolio depends on your Investment goals, timeline, and tolerance for risk.

As always, do your due diligence and consult with your personal Investment advisor, financial planner, and tax specialist before making changes to your Investment strategy.

Guaranteed outcome

Bond and CD ladders can be used to create a guaranteed outcome in a Portfolio.

In this strategy the investor purchases a CD or bond that matures in each year of their retirement. This provides a known source of income during retirement and the yield on the Investment is known at time of purchase.

On 09/07/2021 you could have purchased a 6-year CD ladder consisting of CDs from banks like Morgan Stanley and Goldman Sachs. The overall yield on this Investment would have been 0.725%.

Interest income

CDs, bonds, and dividend-paying stocks are likely candidates when a secure income stream is the objective.

CDs

Widely-available CDs (on 09/07/2021) have annual percentage yields (APYs) in the 0.5% to 1.15% range depending on the number of years you commit your money. Higher rates may be available for large investors.

CD yields may be slightly lower at your local credit union but the lower APY may be offset by the security of minimizing exposure to national and international banks (failure risk).

Government and Agency bonds

US Treasury debt instruments (Bills, Notes, Bonds) offer a level of security that isn’t available with corporate or municipal bonds. Treasury Bills (1 year or less in duration) are considered cash equivalents by the SEC and generally accepted accounting practices (GAAP).

Bonds issued by government-supported-enterprises like Fannie Mae may offer higher yields than Treasury offerings.

On 09/07/2021 Fannie Mae 5-year Notes (Aaa/AA+) due August 25, 2025 were available with a yield-to-worst (YTW) of 0.571%.

Municipal bonds

Municipal bonds are issued by state or local governments.
Interest from municipal bonds is tax-free at the federal level for all US investors. Tax treatment varies at the state level.

California does not charge state residents taxes on interest income from California municipal bonds so it may make sense to invest locally if you live in the Golden State.

Today (09/07/21) you could purchase General Obligation bonds issued by the Burbank CA Unified School District. These bonds mature in August 2026 and yield 0.124% in tax-free income to CA residents.

Dividend stocks

There are no guarantees when it comes to stocks. Taking a 100% loss on a stock Investment is always a possibility.

Investors who are willing to accept the increased risk of equity shares might consider these dividend-paying Precious metals stocks and the relatively high yields they offer (as of 09/07/2021):

  • Newmont Corporation (NYSE: NEM) (3.69%)
  • Agnico Eagle Mines Ltd (NYSE: AEM) (2.38%)
  • Gold Resource Corp (NYSE: GORO) (2.35%)
  • Wheaton Precious Metals Corp (NYSE: WPM) (1.29%)

Mining stocks tend to magnify price movements in the price of physical Gold and Silver. In the current inflationary environment the shares of Precious metals miners have the potential for aggressive capital growth.

Simple

This example Portfolio is simple in the sense that all of the Investment vehicles are offered by the same provider, Sprott Wealth Management (https://sprott.com).

Keeping an entire Portfolio at the same Investment management firm simplifies the rebalancing process as the Portfolio matures and funds are added to or withdrawn from specific segments of the overall Portfolio.

Sprott manages both tax-advantaged and non-tax-advantage Investments making them a true one-stop-shop for some investors.

Stocks (for capital growth) 

The Sprott Focus Trust (FUND) provides exposure to a mix of small, mid, and large-cap equity shares. This vehicle’s goal is long-term capital growth using a disciplined value approach:

The Sprott Junior Gold Miners ETF (SDGJ) focuses on small-capitalization Mining companies with the potential to out-perform the overall sector. Junior Mining stocks can be volatile so this ETF may not be appropriate for all investors.

Physical Precious metals (for financial security)

In contrast to most Investment vehicles, Physical Precious metals have zero counter-party risk. A Gold bar or Silver Coin can’t go broke or declare bankruptcy.

The Sprott Trusts are straightforward and transparent. Sprott buys physical Silver and Gold and vaults the metal in secure storage where it is regularly audited.

Sprott Physical Silver Trust (PSLV)
Sprott Physical Gold Trust (PHYS)

Diversified

Satori Traders recommends a diversified Portfolio consisting of the Investments below. The allocation of funds to each asset class depends on the investor’s objectives and tolerance for risk.

  • Easily accessible physical Precious metals
  • Physical Precious metals held inside tax-advantaged accounts like a Gold IRA
  • Physical Silver and Gold in the Sprott Physical Trusts (PSLV) (PHYS)
  • Select Gold and Silver Mining stocks
  • Bonds or CDs
  • Residential rental property

How to build a retirement income Portfolio

Building a retirement Portfolio for income will likely involve some combination of CDs, Bonds, dividend-paying stocks, and perhaps residential rental property.

Return on an income Portfolio can be increased by raising the allocation to stocks. The Portfolio’s overall risk level rises along with the exposure to equities.

Income-producing real estate may be appropriate for some investors. Because of a nationwide housing bubble, finding a property with positive cashflow will be quite challenging unless you have a significant down payment.

In conclusion

Physical Precious metals and income-producing residential real estate are alternative Investments that allow you to diversify an existing retirement Portfolio without suffering any tax consequences.

If you are concerned about your traditional retirement Portfolio because it contains only one asset class (paper), you can use a self-directed IRA to convert some of those paper Investments into tangible goods like Gold, Silver, and Real estate.

Refer to the Gold IRA page on the website to learn more about tax-advantaged investing and Precious metals IRAs. 

   

Bryan V Post is a California-registered Investment Advisor Representative specializing in the Precious metals.

He is the founder and CEO of Satori Traders LLC, a California-registered Investment Advisor.


Bryan has worn numerous hats during his life:

Engineer, Portfolio manager, Precious metals Investor, Technical analyst, Proprietary trader, Swing trader.