Introduction
If you’re nearing retirement or have just retired, you might be rethinking your investment strategy. Since you’ve stopped working and started living off your investments, you might be less concerned with achieving high growth and more interested in preserving your wealth. You’ll want to have sufficient funds to cover the costs of living, long-term care, and other lifestyle needs.
Although all assets come with a level of risk, some are safer than others. As such, it’s still possible to invest your money with reduced exposure to risk while achieving stable growth. Here are eight low-risk and safer options for seniors.
1. 60/40 portfolio
The 60/40 portfolio is a set-and-forget investment strategy for retirees. Generally speaking, this option has you investing 60% of your portfolio in stocks and the remaining 40% in bonds.
This is a safer approach for those no longer working because the stocks could allow you to achieve higher returns during a bull market while the bonds offer a level of protection against volatility and losses during market downturns.
Bear in mind this approach may expose you to losses during periods of high inflation and increasing interest rates. There’s also the necessity of rebalancing regularly so you can buy assets at lows and sell at highs for gains.
2. Government-issued fixed-income securities
Government-issued fixed-income securities include Treasury bonds, Treasury notes, and Treasury bills. In addition, this category includes Treasury inflation-protected securities (TIPS). All of these are backed by the US government. You hold them until maturity and get your entire investment back. You also earn interest on your investment.
- TIPS – Although the interest rate is fixed, this type of security adjusts the principal based on the rate of inflation every six months. Investors then benefit from rising payments in periods of higher inflation. Also worth noting are I Bonds, which also offer inflation protection but tend to come with lower yields than TIPS.
- Treasury bonds – Treasury bonds have maturity periods of up to 30 years and interest is paid every six months. Treasury bonds tend to yield the highest interest payments compared with T-notes and T-bills.
- Treasury notes – Treasury notes typically mature between 2 to 10 years.
- Treasury bills – Treasury bills are issued for very short maturity periods, typically 52 weeks or less and usually a few days to several weeks.
3. Term deposits or certificates of deposit
Certificates of deposit (CDs) are insured by the Federal Deposit Insurance Corporation (FDIC), and in most cases, they give you a higher return than standard savings accounts and money market accounts.
With a CD, you’re lending the bank your money for a fixed period. This may range anywhere from one month to 10 years. The bank invests this money and pays you a guaranteed interest rate at the end of the period.
CDs have early withdrawal fees, so your money is locked away and you’re not tempted to spend it.
4. Stocks
Stocks usually give you better returns than bonds. Focusing on blue-chip, dividend-paying stocks with lower volatility can be an effective way for retirees to balance out their portfolios with some growth assets.
According to one axiom, subtract your age from 100 to work out the ideal percentage of stocks in your portfolio. This means for a 65-year-old, stocks should take up around 35% of their investments.
However, you should also take into account factors like your overall net worth and tolerance for risk when deciding how much to focus on stocks.
5. High-interest savings accounts
A high-interest savings account is an excellent option for keeping an emergency fund. These pay you interest rates close to those for CDs, and furthermore, they have the benefit of FDIC insurance.
No penalties apply for early withdrawals but there may be limits to the number of transfers and withdrawals you can make. You usually can’t directly spend money from the account to pay for, say, bills, groceries, and other everyday expenses.
6. Investment property
Real estate investing may require more capital, but buying the right property can provide retirees with steady rental returns and capital growth over the longer term. You’ll have to manage tenants as well as the property (or have a property manager oversee it).
Also, remember an investment property is an illiquid option. It’s much more complex and time-consuming to sell a house or commercial property than to offload some shares.
Investing in real estate investment trusts is an alternative way to access the benefits of real estate investment without the commitment of ownership and being a landlord.
7. Fixed annuities
Fixed annuities are a low-risk investment for retirees as they provide a guaranteed income stream for a specified period, typically until you die. At that stage, your beneficiaries will receive whatever you paid for the annuity minus the payments you’ve already received.
You may be able to invest in a fixed index annuity, which could see your investment amount growing according to an underlying index, such as the S&P 500.
However, there are steep penalties for early withdrawals, and it’s crucial to verify the financial status of the company you’re buying the annuity from.
8. Insurance
Insurance isn’t a traditional investment option, but it’s useful for retirees to think of it as one. You might have dependents such as a partner you’d like to take care of in case the unthinkable happens. In that case, life insurance tailored to your situation could make an affordable, safe investment.
Other types of insurance to consider include comprehensive health, dental, and optical insurance. Long-term care insurance helps cover the cost of care services like nursing home expenses, home health care, and assisted living, along with home modifications.
Conclusion
With every milestone in life such as retirement, it’s essential to review your assets and changing risk appetite. You can then adjust your strategy to match your new risk appetite and changing financial goals. From bonds and stocks to property and annuities, there are lots of options to choose from.
Find the right asset allocation approach for your and your goals. Go back and review your investments regularly, especially if your financial situation changes. As always, seek professional advice from a qualified advisor if you have any doubts.
