Retirement 101: Setting up your portfolio

by | Jun 18, 2021 | Retirement 101 | 0 comments

Table of Contents

Setting up your retirement portfolio

Now you know a little bit about what kinds investments you might want to purchase. It’s time to go buy some!  But, you’re not going to hop on a plane, fly to New York, and start shouting numbers outside the stock exchange.  In order for an individual investor to buy investments like stocks, bonds, and index funds, you will need to open an account at a brokerage. The brokerage will then handle the stock exchange side of things for you.

Not pictured: You.

A regular brokerage account is sometimes called a “taxable” account. It’s just a normal account without any of the specific retirement benefits that we’re looking for. You probably don’t want a taxable account… at least not yet. First, you want to take advantage of any retirement accounts that you’re eligible to participate in. The most common of these are the employer-sponsored plans known as 401(k)s (or sometimes 403(b)s. They’re the same enough for our purposes.)

The most important thing about 401(k) retirement accounts is that many employers match their employees’ contributions, up to a certain amount. That’s basically “free money.”  The next most important feature of a 401(k) is that your contributions are tax-deductible.  If you contribute $10,000 to your 401(k) this year, your AGI on your 1040 will be reduced by that same $10,000, which could significantly lower your tax bill.  Contributing to your 401(k) at least up to the maximum company match amount is pretty much a no-brainer. Anyone who has the means to do so should do it, and anyone who doesn’t have the means should do a deep dive into their spending habits to figure out how to contribute at least that matched amount! (We explore how to do that sort of deep dive in an upcoming article.)

401(k)s can be rather limited in fund selection, depending on who operates yours. Unfortunately, you’re stuck with whatever funds your company’s 401(k) administrator offers. Most 401(k)s allow you to purchase a small selection of index funds, some actively managed mutual funds, and often Target Date funds. Use the information you learned in the last two articles to select a couple of low-fee index funds, or just go with a Target Date fund and call it a day.  

(If you have a fund you’d like to invest in, and it isn’t offered through your 401(k), you can set up an IRA at a regular brokerage any buy it there. But make sure you’re taking full advantage of your employer’s company match, first!

401(k) accounts have a few other benefits, a couple of drawbacks, and some other important rules to understand. If you’re not sure that you understand the ins and outs of 401(k) and 403(b) accounts, check out my previous series: 401(k) 411

Beyond the Employer match
Once you’ve contributed enough to maximize your employers match (or if your employer doesn’t do a match!) it’s time to explore the other type of retirement accounts, and figure out where to stash the rest of your monthly retirement savings.

Traditional IRA
An IRA is an Individual Retirement Account. These accounts are similar to a 401(k) in many ways, though they are not employer-sponsored. Instead, anyone can open up their own IRA (or multiple IRAs!), and they are available from many brokerages, banks, and other financial institutions.
Main similarities with a 401(k):
  • Contributions to a traditional IRA are tax deductible
  • Funds grow tax-free until you start withdrawing during retirement, at which point they are taxed as regular income.
  • If you withdraw funds before retirement, you pay income tax on the earnings plus a 10% penalty
  • There are also some similar creditor protections, though depending on the state you live in, those protections may not be as strong.
Main differences with a 401(k)
  • Lower contribution limit ($6000 in 2021)
  • Maximum income limit; if you earn more than the limit, you lose the tax-deductions (but can still contribute).
  • You can have as many IRAs as you want at various institutions and contribute to any combination of them each year
    • This gives you access to just about any kind of investment vehicle (equities, real estate, etc.) that you could imagine, as opposed to the limited selection of funds in most 401(k)s.
    • The total IRA contribution limit across all accounts is still just $6000. So if you split your contributions evenly across three different IRAs, you could put $2000 in each.
Roth IRA
  • Similar to a Traditional IRA except that contributions are NOT tax deductible. Instead, you get to withdraw your contributions and earnings completely tax-free after you hit retirement age.
  • The same $6000 limit applies across both types of IRA. So if you put $1000 in your Roth IRA, you can only put $5000 in your Trad IRA.
  • Different income limits. If you make over the limit, you cannot contribute to a Roth IRA at all.

How to choose where to open your IRA

IRAs are provided by many different financial institutions. Here are the top three things I look for when choosing an IRA:


  • Investment type – If you’re looking to invest your retirement funds in broad market index funds, then make sure your provider offers the one’s you’re interested in!  Bank-provided IRAs often don’t have much in the way of investment options. Other relatively niche providers may specialize in crowdfunded real estate, personal loans, or other investments that you’re not interested in.
  • Fees – Make sure to review the fee schedule of any account you’re looking at. The big players in this industry generally offer accounts with no maintenance fees and minimal to no transaction fees.  Don’t sign up with someone who will charge you an arm and a leg just to have the account, and then even more every time you want to make a transaction!
  • Customer service – Once you’ve narrowed down your options using the above criteria, read some reviews to get an idea what the customer service will be like. Most of the big players are relatively similar in this regard. Their free options will be mostly self-service, but it’s good to know what kind of help you can expect if you run into any issues.

Brokerages vs Funds vs Accounts

Once your retirement plan really gets rolling, you may find yourself with a handful of accounts across various providers. It can get confusing if you’re not careful.  Be sure to understand the difference between brokerages, accounts, and funds, and how they all fit together.

So to reiterate:

  • A brokerage is a company that buys and sells stocks, bonds, and other financial instruments on your behalf. You can have accounts at as many brokerages as you want. You do not have to close out or transfer funds from an older account in order to open a new one.
  • An account is a specific “bucket” of funds that you own via your brokerage. IRAs are a special kind of account with their own rules. There are other special kinds of accounts, too.  At most brokerages, you can have as many accounts and types of accounts as you want. You can also choose to have multiple of the same type of account at more than one brokerage.
  • A fund (mutual fund or index fund) is the actual investment that you own a share of, in one or more of your accounts. You can own multiple shares of the same fund across different accounts at different brokerages.

So, you may choose to have a Traditional IRA and a Roth IRA, and maybe eventually a regular taxable investment account. You may choose to have all three at one brokerage, or you may have them all at different brokerages. To complicate matters, many of the major brokerages (like Schwab, Fidelity, and Vanguard) also manage mutual funds and index funds… but you don’t typically have to have an account with them in order to buy shares of their funds. So you may own Vanguard’s Total Stock Market Index Fund inside an IRA at Fidelity. You may also own shares of that same fund in a Roth IRA at Schwab.  And if you have a regular taxable investment account at Vanguard, you may own shares of Schwab and Fidelity managed funds in it.

All of that is just fine, but you need to be careful to have a strong understanding of how it all goes together for your particular set of accounts. And remember not to exceed any contribution limits if they are IRAs. (You can only contribute up to the limit across all your IRAs, not per each individual account.)

Also, be sure to watch out for transaction fees! Many brokers will sell you their own funds for $0 transaction fees, but charge upwards of $75 per transaction with other companies’ funds.


When should I consider a taxable investment account?

For most people who plan on retiring at or after traditional retirement age, it only makes sense to invest for retirement in a regular taxable account if you’ve already maxed out your 401(k) and IRA contribution limits. For non-married person in 2021, in most circumstances, that means that you’d have to be contributing a total of $25,500 to your 401(k) and IRA. That’s $2,125 per month. If your plan involves investing more than that, then by all means consider putting the overage in a regular taxable account. If you’re investing less than that, though, then it’s best to fill up your tax-advantaged retirement accounts, first. The main exception is if your employer provides a truly terrible 401(k) with high fees and poor fund selection. In that case, you’ll have to run the numbers for your specific situation to see if the tax advantage of the 401(k) is negated by the fees.

Another reason to consider a taxable account is if you’re saving up for something other than retirement, but that you aren’t going to be ready to purchase until more than 10 years from now. For instance, you might be saving up to buy your dream house, but due to work or family circumstances you won’t be able to move to your dream location for more than 10 years.  In that case, having at least a portion of your savings in the market might make sense. And you won’t want it to be locked into a retirement account if you are going to spend it before retirement age. 

Finally, if you plan on retiring early, you may want have a portion of your retirement funds in a taxable account.  Find the number of years between your early retirement date and when you can withdraw funds from your retirement accounts without penalty. If it’s less than ten years, you’ll probably want to put enough to cover your full expenses for that timeframe in a taxable account (expenses multiplied by number of years). If it’s more than ten years, you might be able to reduce the amount of taxable investments you need to less than the “expenses multiplied by number of years” amount. That’s because your investments will continued to grow during that timeframe. This is a relatively rare scenario, so I won’t go into more detail here. If you’re interested in figuring out a custom retirement plan, get in touch!

Today’s task:

  • Make a list of your existing retirement accounts. 
  • Make a plan for how much you will contribute each type of account this year. 
  • Log into each account and set up automatic contributions, (or make a lump sum contribution if you prefer, and have the savings lying around already). If you can’t yet afford to make the contributions that you’d need to make to hit your retirement number on time, just do your best to put in as much of it as you can.
  • If you don’t yet have an IRA, and getting one is potentially part of your plan, open one right now! It’s quick and easy to do online, and most major brokerages have very low minimum balances to open the account, or none at all! You may see minimum amounts for purchasing mutual funds. Many start at $1000 minimum investment. However, you don’t need to purchase any shares of mutual funds yet if you don’t have the savings lying around already! Just open the account so it’s ready when you are. (If you later decide that you chose the wrong brokerage, no problem! Just open another IRA at the new brokerage of choice. You can close the old one, or just leave it there.  You’re allowed to have as many IRA accounts as you want, as long as you don’t contribute more than the yearly maximum in total across all of your accounts. 

 “WAIT!!! All we’ve talked about is types of funds and accounts. I still don’t know how to analyze a stock chart! How will I know exactly when to buy my funds, or how they’ll perform this year!!!”

There’s a very good reason why we haven’t explored these things. Trying to time the market for optimal returns doesn’t work. And stock chart analysis, also known as “technical analysis” is not scientifically valid.  It’s basically the investment equivalent of reading tea leaves. 

Fundamental analysis is real. It’s the process of reviewing the fundamentals of a given company to evaluate whether they are worth investing in. Since we’re not investing in individual stocks, we don’t need to dive deep into the world of fundamental analysis.

Technical analysis, on the other hand, is an attempt to predict a given stock’s short term rise or fall based entirely on the shape of its performance chart. It’s guesswork based on patterns that have nothing to do with real world reasons behind those patterns. It was designed by short-term investors (day-traders) as a way to justify their quick purchases and sales that aren’t based on the underlying quality of the stocks they’re choosing. Day traders often hold a given stock for less than a day, hoping to capitalize on volatility rather than actual growth.

We’re not doing that. We’re in this for the long haul. We’re relying on the market average as a whole over very long timeframes. We don’t need to analyze a specific company’s performance or management, and we certainly don’t need to worry about the zigs and zags of short-term volatility.

It might feel nice to buy an investment right before it has a little uptick in value. But over the long term, those ups and downs will still average out to around 10% (before inflation). It’s far more important to get in the market now than it is to try to wait for the “perfect” time. As the old saying goes: “Time in the market is always better than timing the market.” 


In Summary:

There’s a lot of technical jargon out there that makes investing look complicated. Some of it may be worth looking into eventually, to squeeze out one last percentage point of returns. Most of it has nothing to do with long-term broad market investing. If you’re planning for traditional retirement age, here’s all you need to do to get started:

  1. If you have access to a 401(k), set up recurring contributions. Use the amount that you came up with in Part  5 (Changes), making sure that it gets divided up between your selected funds according to your chosen asset allocation. Most 401(k)s make this easy to set up. 
  2. If you’ve maxed out your 401(k) contributions, open an IRA and set it up the same way with your remaining monthly savings. (If you’re in the very rare scenario of being able to max out your IRAs as well, good for you! Set up a taxable brokerage account the same way.)
  3. Either rebalance manually once a year, or let your brokerage do it for you if they provide that service.   
  4. Every year or two, increase your contribution amount by $20 – $50 per month, as your income rises. (Or set your contributions as a percentage of income and increase that percentage by ~1% every year or two.) 

That’s it. Really. You don’t need to learn how to “read charts,” or what parts of a company’s prospectus might be red flags. That’s all the domain of people who invest in individual stocks, and we don’t do that. We have chosen the “easy” way… which also turns out to be more effective!