The Portfolio Move That Could Help You Get Ready To Retire Early

The question of when to retire can be tricky to answer for a lot of people. Retiring early can give you the freedom you need to travel, explore different hobbies, and even pursue other avenues for bringing in an income. However, without the proper preparation, early retirement can also stretch you extremely thin financially, and all that time for leisure can prove surprisingly taxing to fill. 

One way to mitigate the risk of outlasting your retirement savings is to segment your portfolio in different "buckets". You may already know that putting your entire savings into a single investment vehicle is one of the mistakes you should never make before retirement. While diversifying is a great way to prepare for a market correction and minimize financial volatility no matter where you're at in your career, segmenting your savings takes this notion a step further: Utilizing this strategy, you can help direct the potential stability of your life post early retirement by amassing assets of several distinct natures to fund various stages of your retirement. To fund your life in the years immediately after you stop working, you could set aside cash reserves or invest in low-risk accounts like certificates of deposit (CDs) or bonds. Meanwhile, you can also make riskier investments in assets like stocks, which have stronger long-term growth potential. As you withdraw funds from your conservative assets in the early years of your retirement, those growth assets will hopefully have time to increase in value and recover from any market swings, allowing you to use them to fund your later retirement years.

When utilizing this model, many experts recommend putting the largest share of your retirement funds toward long-term growth assets. That way, as your equity investments grow, you can gradually transfer the gains back into the conservative portion of your portfolio to top it back up. But if the market has gone down, you can leave your stocks untouched and keep spending from your conservative portfolio until your stocks rebound. Since stocks have a reputation of performing well over a longer time frame, staying with them long enough could compensate for any short-term volatility.

There are other benefits to the segmentation strategy as well. Having a segment of your savings in an aggressive portfolio like stocks would protect your portfolio against rising inflation. At the same time, having immediate cash available for the next few years would spare you the financial anxiety — which can be far greater in an early retirement — of watching your equity investments take a dip.  

In fact, apart from just having a conservative and an aggressive bucket, you can also incorporate a middle bucket for moderate risk consisting of funds meant to reinforce any gaps left by your conservative and growth assets. This bucket could include assets such as longer-term bonds, exchange-traded funds, or a mix of stocks and bonds. You can use this bucket to replenish the first, while also reaping a higher return on them in comparison to CDs or cash sitting in your savings accounts.