Planning for retirement can appear to be a daunting task, especially if you don't have a background in finance or accounting. However, despite the seeming complexity of the task, building a sizable nest egg for retirement is a not as difficult as it seems.
In fact, investors who want to build a retirement portfolio have a lot of instruments and tools at hand in order to take charge. Real estate investment trusts, or REITs, are particularly suitable for income investors who need to build a portfolio of dividend paying stocks in order to fund monthly living expenses later on in life.
Building a REIT-based retirement portfolio makes a lot of sense: REITs, by law, are required to pay out most of their earnings to shareholders. They are often highly diversified and offer investors some form of inflation protection due to rent indexing and increasing property values over the long run.
Investors who are determined to follow through with a rigorous, long-term financial plan and are persistently making their investment contributions have a good chance of building a strong and resilient REIT-based retirement portfolio as long as they follow five basic steps to build wealth:
1. Start young
By starting young you are gaining a tremendous advantage over people who start with their retirement plan later in life: The power of compounding will work its magic for you sooner and for a longer period of time.
That way you build up a sizable nest egg without being tempted to spend your money on things you don't really need.
As a general rule, the younger you are, the higher the allocation to risky equities can be. As you age and transition into your 50s, you should gradually move your assets into low risk bonds.
Mutual funds are a good start to conceptualize your financial planning.
High quality REITs such as Realty Income (NYSE:O) or Omega Healthcare Investors (NYSE:OHI) provide investors with recurring income while offering exposure to convincing long-term trends in real estate and senior health care demand.
These REITs have outstanding shareholder remuneration records, top management, and strong property portfolios generating recurring cash flow. Both REITs invest in real estate for the long-term and have proven over many business cycles that they can consistently deliver value for shareholders. And as we all know: A constant, reliable stream of cash is most valuable in times of market uncertainty.
5. Reinvest dividends
Probably the most undervalued theme for building a sizable retirement nest egg relates to reinvesting dividends. Reinvesting dividends or bond income allows investors to utilize the power of compounding and to smooth out the inherent fluctuations in the stock market.
If you do all of this on a persistent basis, your retirement nest egg will grow quickly and may even allow you to retire early.
Kingkarn Amjaroen owns shares of Realty Income. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.