The closer you get to your retirement, the fewer risks you should be taking with your money and investments. That’s just good common sense, because you can’t find yourself after you stop working “losing” value in your nest egg or you will be in for real trouble. But it isn’t as easy as it sounds, because while you are looking for something that’s really “safe” and carry at most minimal risk, you are also looking for something with some kind of growth so you can keep ahead of inflation at the very least. So how do you find safe investments when you are in the retirement mindset?
Diversify Your Investments
The best investment advice for anyone, retiree or not quite there yet, is to diversify. That’s because it is a way to avoid putting all of your eggs into just one basket and gives you a hedge or safety net on exactly what happens in a typical market cycle.
As the market changes over time, there are always parts that make gains and other sectors that lose money. It just happens that way and it’s very difficult for even so-called “experts” to try and read what will happen. Diversification somewhat allows you to cover all bases and limit your risk. It spreads your investments over several investment vehicles. But even in your retirement years, you still want to look at growth potential to counteract the inflation rate which will have a real impact over you in what may be the many years you have ahead of you in your retirement.
What Are Some of the Safer Investments?
There is a certain amount of risk in any kind of investment, but some things are just plain safer than others. Yes, bank CD’s, savings accounts, and money market accounts as well as U.S. Savings Bonds are safe, but they don’t always keep up with the inflation rate (U.S. Series “I” Savings Bonds will, but they are dollar limited annually if you make a purchase).
There is also the factor of being “insured” like those insured by FDIC insurance that guarantees your money is safe. It is a trade-off to be sure.
You can invest in corporate bonds either individually or less risky bond funds that represent a pool of corporate bonds. The only problem with that is that they are not insured by the FDIC and you can lose part or even all of your money when you do.
Stocks That Pay Dividends
Stocks are high risk. I stayed out of the market and away from stocks for most of the past ten years and it was a safer place and way to be. Stocks are high risk because they offer great growth potential, but it is a little like spinning the roulette wheel in a casino: sometimes you hit it big and sometimes you just don’t.
A safer place to be investing in stocks is to invest in stocks that pay you a dividend. Generally, you are going to get some earnings regularly when you do and they are generally less risky investments, but of course have lower growth possibilities.
These stocks fall somewhere between bonds and common stocks in risk. They do pay dividends, but after they pay to bond holders and before they pay to common stock holders so you may want to consider them.
These investments are pretty popular and municipal bond funds are safer than individual bonds. Invested in a local municipality, your risk is that a city can go bankrupt and when it does you can lose all of your investment that you have purchased (or loaned to the entity) and they can’t pay you back. One other good news piece here is that these funds can exempt you from income tax on earnings you get which is very appealing to a retiree.
Annuities (Fixed, Indexed, Immediate, and Variable)
Annuities are very safe and are really insurance instruments that are rated and guaranteed by the companies that issue them. All except variable annuities have known values and rates of return. What can be confusing is the commissions and fees, so you need to be sure you understand what you are getting into before committing.
Variables are tied to the stock market and offer higher reward potential but also risk. I like the idea of knowing exactly what my investment is worth and what it will pay me in retirement. That is why I chose a deferred fixed annuity and am using it to supplement my retirement right now.
Rental Income Investments
Many people have fallen in love with buying properties and then renting them for income. For seniors though, it can be more of a burden than a profit center. There are maintenance costs and repairs, lease gaps and evictions, and overall times when contracts are unclear and problems arise. It’s not always as lucrative as it may sound to you.
Home Equity in Your Home
If you have had your own home for many years and have built up lots of equity in it by the time you retire, you may have hit a safe place to supplement your living expenses from that. A Home Equity Line of Credit (HELOC) or a Home Equity Loan actually has already built up your profits as an investment would and allows you to use it right now at low costs. A HELOC will not cost anything to set up and doesn’t ever have to be used. It will act as your insurance that money is there easily if and when you need it. A Home Equity Loan will have application fees and higher interest and will require a payback.
Another option is a reverse mortgage. A reverse mortgage is a loan for senior citizens using your home as equity collateral. In general, the loan does not have to be repaid until the last surviving qualified homeowner decides to move out or passes away. There are drawbacks with this type of arrangement, so be careful before proceeding.
When you are younger, your time horizons to plan ahead and take risks expand. As you approach retirement, not so much and that’s why you have to do a lot of homework when it comes to investment decisions and both growing and protecting your retirement nest egg.
Making the right decisions and also making smart tax decisions about any income or growth is so important and that is what gets you the peace of mind you need when you finally do stop working.
Have you planned safe investments for your retirement? What is your retirement investment strategy plan and what scares you most when it comes to money and retirement?