Last week, I told you where to put your money if (1) if you have less than $100,000 to invest (in Message #1248), and (2) if you have more than $100,000 but less than you need to retire (in Message #1249).

Today, I’m going to give you the ultimate retirement portfolio. And this will be coming from someone who has already retired . . . twice!

But, first, I’m going to start by saying this: You SHOULDN’T retire.

Forget about the fantasies you have about spending your golden years basking in the sun, putting around a golf course and/or visiting exotic tourist destinations with your spouse or temporary “playmate.” Although you’ve had a lot of fun indulging yourself in such activities before, they won’t keep you happy in retirement. To sustain your personal happiness for any length of time, you need a sense of purpose. Amusing yourself is not a purpose.

So whatever you may think you want to do now, keep this thought in mind: You don’t want to retire from a purpose-driven life.

In fact, there are two very fundamental needs you need to meet in order to have a successful and enjoyable retirement:

1. Meaningful work.

2. Sufficient income.

Meaningful work can include the time, energy, and love you give to your family, your friends, or strangers. It can include projects you care about and hobbies that inspire you. It can involve volunteer work or part-time employment. But what it must include is something only you can provide — your heartfelt belief that what you are doing means something.

Sufficient income depends on your lifestyle. In previous messages, I’ve suggested this very simple formula for deciding how much money you need to retire: Figure out how much you spend each year to maintain your current lifestyle. Add to (or subtract from) that number what you’d need (or not need) to have an enjoyable life in retirement. And multiply that number by 10.

If you can be happy on a pre-tax income of $100,000, you’ll need a retirement nest egg of $1 million. If you think you’ll need about $300,000 a year (again, pre-tax) to live your dream life, you’ll need about $3 million in savings.

If you are smart, when you hit that number, you’ll radically change your life so that you can have more time to enjoy those things that really matter to you. Let’s assume that you are there already. How should your retirement portfolio be set up?

My recommendation is very simple. I suggest you have your wealth invested in a combination of:

1. stocks and stock index funds

2. fixed-income instruments

3. managed rental real estate

4. precious metals

5. cash

6. play money

Let’s take a look at these, one at a time.

1. Stocks and Stock Index Funds: As I’ve pointed out before, you won’t need much money in stocks if you have a reasonable amount in real estate. On the average, stocks will give you a 10% return. Real estate should give you more than that. I will probably never have more than 10% of my money in equities (of any kind), because I don’t get any enjoyment out of equity investing. But for people who do like the fun of watching the stocks they pick go up and down, I believe a 20% commitment is reasonable. I wouldn’t recommend more than that — even for a 50- or 60-year-old retiree. Why? Because the stock market, generally (and individual stocks, especially) is unpredictable in the short term. And when you are living out your golden years, everything is short-term.

2. Fixed-Income Instruments: I like bonds. Even in today’s low-yield environment. Quality bonds give you the peace of mind that you should be looking for in retirement. I like all sorts of bonds, but I’m particularly fond of municipal bonds. They are very safe and offer tax-free income. So a return of 4.5%, for example, might be worth as much as 7% if you are in a top tax bracket. The thing I like best about bonds is how simple they are. If you hold them till they mature, as I do, they are the perfect, zero-hassle, zero-worry investment. You know what return you are getting when you buy them . . . and that’s the end of it. Bond funds are a good alternative if you want to diversify a bit. Like individual bonds, they can give you a fixed rate of return, simplicity, and peace of mind. What percentage of your retirement portfolio should be in bonds? If you have enough money to live well off a yield of, say, 4.5% or 5% after taxes, you can have most of your money in bonds. My closest financial adviser, Sid, has all his retirement funds in bonds. Chances are, you will need to earn a higher return. If so, I recommend allocating between 40% and 50% of your funds to bonds.

3. Managed Rental Real Estate: Rental real estate can offer some very impressive rates of return — depending on how you measure  them. A $75,000 investment in a triplex 10 years ago in my hometown in South Florida would be worth about $300,000 today. With a net rental yield of about $20,000 a year (after property taxes, upkeep, and management fees), that investment is earning either 27% or 7.5%, depending on whether you calculate from the original investment or the appreciated value. In a case like this, you might be better off selling the property and investing the money in bonds. If you could get a 5% return and were in the highest tax bracket, your effective yield would be 7.5% or better. (These are very rough calculations. I’m not taking into account depreciation, continuing appreciation, other write-offs, etc.) But most of the real estate deals I bought seven to 15 years ago are producing rental yields of between 10% and 15% of their current (admittedly conservative) estimated value. That higher yield, combined with the continuing appreciation of property in general, is why I recommend a 20% to 40% commitment to managed rental real estate.

4. Precious Metals: I’m not a gold bug, but I do like the idea of having some bullion hidden in a safety deposit box in case of emergency. I don’t think you need a ton of gold — I’m not that worried about what the future might bring — but I do think having between 2% and 5% of your investable net worth in gold is a sensible approach.

5. Cash: We all need some cash “just in case.” I recommend a sum that’s equal to about three months’ worth of what you typically spend.

6. Play Money: Retirement is supposed to be fun. And some fun — not the best kind of fun, but some fun — costs money. I’m not talking about money that you spend on golf and vacations. Your general retirement funds are supposed to take care of that. I’m talking about the fun of trying new businesses or converting passions or hobbies into profit centers.

If you are good and lucky, you’ll have fun and make some money. But if you don’t make money with this portion of your portfolio, that’s OK too.

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]

Mark Morgan Ford

Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Wealth Builders Club. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.