Most Americans in retirement still have at least one job: Keeping the money they’ve made in their working years and not losing it in the financial markets or by overspending.
As any money manager will tell you, that’s good advice. Any money manager will also say it’s OK to make a low-risk investment while still aiming for good returns on that investment.
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Realigning your portfolio strategy for lower risk takes some preparation and a transition to a new mindset.
“In your working years, you probably steered (toward) investing 70% of your portfolio in equities and 30% in fixed-income products,” says Paul Tyler, chief marketing officer of Nassau Financial Group in Hartford, Connecticut. “As you approach retirement, however, common wisdom suggests you’re better off navigating to a 60%-to-40% split between stocks and more defensive investment vehicles like bonds and annuities.”
“Doing this reduces your exposure to market storms that may set you off (course) later in life,” Tyler adds.
Where to start with your retirement portfolio realignment? Begin with the following six low-stress but high-return potential investments that can provide both safety and security gains once you enter retirement. The focus of each of these instruments is capital preservation and income more than portfolio growth:
— Bonds.
— Certificates of deposit (CDs).
— Dividend-paying stocks.
— Preferred shares.
— High-yield savings accounts.
— Annuities.
Bonds
Given their conservative nature, bonds have historically been a cornerstone investment for retirement investors. Wealth managers routinely recommend bonds for senior clients due to their propensity for consistent income and portfolio protection, and their ability to augment other retirement income sources such as Social Security, 401(k), IRA and pension payouts.
“By their nature, bonds tend to be conservative investments and are a useful tool to remove risk from a portfolio,” says Bradley Thompson, a financial planner with New Canaan Group in New York. “That’s because they typically pay a fixed amount over a fixed period of time.”
In mid-2023, as bonds are sensitive to rising interest rates and rates are much higher than they were in the pre-pandemic years, a “mix of Treasury bonds issued by the government and high-quality corporate bonds that pay higher interest may be appropriate for investors,” Thompson says.
For individuals in high tax brackets or high-tax states such as New York, California and Massachusetts, municipal bonds are an attractive option for retirees.
“That’s because their yields may be higher than Treasury or even high-quality corporate bonds once you account for tax savings,” Thompson says.
[SEE: 7 Dividend Stocks to Buy and Hold Forever]
Certificates of Deposit (CDs)
In 2023, bank savings rates are on the upswing, thanks to high interest rates. The same goes for certificates of deposit, where savings returns are at historically high levels. Take 12-month CD rates, with returns around 5% up to 5.3%. Or six-month CD rates, some of which also clock in at 5% in August.
Bank and credit union CDs are useful for any security-minded investor. Like any bank savings vehicle, they’re protected for up to $250,000 by the U.S. Federal Deposit Insurance Corp., which insures U.S. bank deposits. “CDs offer a great starting point because, assuming the investor is under the FDIC limit, they are insured and offer great rates now,” Thompson says.
But CDs have other characteristics that make them particularly useful for income and safety. For example, many CDs also offer an estate planning benefit for older individuals known as a “death put.”
“The idea is that if someone purchases, say, a five-year CD for 5%, and dies in the first year while rates are now 6%, the person who inherits the CD has the option to get the issuer to buy it back,” Thompson says. “They can now reinvest at the 6% rate or use it to help pay for any final expenses.”
Dividend-Paying Stocks
While retirees should emphasize capital preservation practices with their investments, they can absorb some risk with stable and reliable stocks that fit their investment needs and goals.
“As investors get nearer to retirement, they have less time to recoup losses, so it makes sense that they become more cautious and risk averse,” says Richard Gardner, CEO at fintech product and services provider Modulus Global in Scottsdale, Arizona. “The kinds of investments that best fit an investor depend greatly on just how risk averse they may be.”
That’s where dividend stocks can make a big difference.
Dividends are usually attached to blue-chip stocks that provide dividend holders a steady stream of income payments while insulating against stock market volatility.
For retirement investors willing to carry more risk, blue-chip dividend stocks provide a solid blend of income and growth, and can supply income for retirees over the long haul.
That’s because dividend stocks are both durable and profitable. Since 1960, reinvested dividends and compounding have accounted for 69% of the total return of the S&P 500, according to Hartford Funds’ most recent study of returns through December 2022.
Preferred Stock
Preferred shares are just what their name implies, as they give investors an inside track on a publicly traded company’s financial payouts.
For example, preferred stock owners typically receive a fixed dividend that is paid out before any dividends are paid to common stock owners. Preferred shareholders are before common shareholders and behind bondholders in line in the event of a company’s bankruptcy or liquidation.
While preferred shareholders have no voting rights, their shares often offer higher yields than common stocks or bonds, and they’re also less volatile than common stocks, especially in roiling markets.
On the flip side, preferred shares are more complex than common stocks or bonds and may be more difficult to understand.
“Preferred shares can still be subject to price volatility, particularly during market downturns,” says Jeffrey Wood, a partner and investment advisor at Lift Financial in South Jordan, Utah. “They may have call features, meaning that the issuer can redeem the shares at a certain price, potentially leaving the investor with reinvestment risk.”
[READ: Bonds vs. Stocks: Differences in Risk and Reward]
High-Yield Savings Accounts
At a time of high inflation and rising interest rates, high-yield bank savings accounts can provide steady and reliable income for retirees.
For example, the average basic bank savings account offered a 0.42% interest rate as of July 2023, according to the FDIC. Compare that to the 5% interest rates on high-yield savings accounts at many banks and credit unions in August.
CIT Bank, for instance, offers a 5.05% interest rate on its Platinum Savings account, with a $5,000 minimum deposit. My Banking Direct does one better, offering a 5% interest rate on its High Yield Savings account with only a $500 minimum deposit.
High-yield bank savings accounts not only offer higher interest rates, but they also provide robust liquidity for account holders who may need to access their bank savings account on short notice with no fees attached to the withdrawal.
Annuities
Like bonds, CDs and other retirement-oriented investment vehicles, annuities play a useful role for retirees to help cover expenses and provide some much-needed post-working-years income.
In particular, fixed annuities, a financial vehicle that guarantees a fixed interest rate for a specified period of time, can offer retirees a way of locking in high rates now that can provide great income in the future. But there are caveats.
“These are tax-advantaged investments, in that gains can build tax deferred, but that does come with penalties if money is withdrawn before retirement age (59 ½),” Thompson says. “Also, the investor may lose access to the funds and there may be termination penalties if the money needs to be withdrawn, so it’s best to read the fine print before purchasing.”
For individuals who don’t need liquidity today and are more worried about outliving their money, a deferred income (or longevity) annuity can help, too. “Deferred income is a great solution because it offers high payouts, but payouts typically don’t begin until much later in life,” Thompson says.
Diversification and Risk Reallocation in Retirement
On its own, adding low-risk, high-opportunity investments to a retirement portfolio is a solid financial move, but there’s another move to make to fireproof your investments in retirement.
That step is diversifying your retirement investment portfolio once your working years are over. “Diversification of your portfolio is essential to generating reliable, risk-adjusted returns while promoting financial health,” says Sundip Patel, CEO of Avana Capital, an asset management company in Peoria, Arizona.
Portfolio diversification means spreading investments across multiple asset classes. That reduces the potential of losing a huge sum of cash, which can occur if an investor’s retirement funds are all placed in one basket.
“Timing can be everything, and if you anticipate taking less risk in retirement, you should begin preparing to do so at least three to five years in advance.” – Bradley Thompson, financial planner, New Canaan Group, New York
Diversifying your retirement assets may curb the risk and volatility that can decimate an investment portfolio. In doing so, an investor can also limit or even avoid portfolio volatility that keeps a retiree’s capital preservation strategy on track.
Retirement investors should also review their allocation at regular intervals, and make sure their investments are aligned with their goals. Doing so before you retire is even better.
“Timing can be everything, and if you anticipate taking less risk in retirement, you should begin preparing to do so at least three to five years in advance,” Thompson says. “As someone nears retirement age, they are likely at or near their peak income, and if an unexpected life event happens, like a job loss or illness, it may be hard to replace their earning power.”
If an investor waits until the last moment to remove risk from their investments, they may end up selling into a down market.
“By gradually reducing your risk as you near the retirement milestone, you can potentially avoid selling at the worst possible time,” Thompson adds.
Consider an investor who made the decision in 2021 (when the market was high) to retire at the end of 2022 and waited to reduce risk.
“If they were more heavily invested in stocks during 2022, they might have needed to revisit their plan, simply because they waited an extra year,” Thompson says. He acknowledges, though, that most investors still need some risk in their portfolios to meet their goals.
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6 Low-Risk Investments With High Returns for Retirees originally appeared on usnews.com
Update 08/09/23: This story was previously published at an earlier date and has been updated with new information.
