Preserving capital is at least as important to retirees as growing their accounts. Nobody wants to outlast their retirement funds. That’s why it’s crucial to have retirement investments allocated in a way that generates income as well as growth.
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Retirees and those approaching their final working years often rank safe investing over capital growth investments. Investors who are more comfortable with risk will own more stock assets and fewer bonds and vice versa. A financial advisor and a gut check on risk tolerance can help you figure out what asset mix will work for you.
In the meantime, here are seven investments that can help create a balance of income and growth:
— Dividend-paying blue-chip stocks.
— Municipal bonds.
— Stable value funds.
— Real estate investment trusts.
— Index funds.
— High-yield savings accounts.
— Certificates of deposit.
Dividend-Paying Blue-Chip Stocks
Quality dividend stocks have long been a staple of retirement accounts, with good reason.
“Dividend-paying blue-chip stocks offer stability and reliable income through regular dividends from established companies with strong financials,” says Cliff Ambrose, founder and wealth manager at Apex Wealth in Danvers, Massachusetts.
Many of the S&P 500’s most established companies are financially sound, less volatile and have a history of consistent performance. This makes them ideal for retirees seeking steady returns and reduced risk.
Additionally, dividends can help offset inflation and preserve purchasing power over time.
An exchange-traded fund like the Vanguard Dividend Appreciation ETF (ticker: VIG) is an easy way to get a basket of stable dividend payers. Top holdings include Apple Inc. (AAPL), Broadcom Inc. (AVGO) and Microsoft Corp. (MSFT), so there’s plenty of room for growth along with dividends.
Municipal Bonds
A municipal bond, or muni bond, is debt issued by a state or local government to fund public projects and infrastructure.
Municipal bonds offer retirees stable, tax-free income, lower risk and a predictable return. This makes them suitable instruments for preserving capital and generating income.
“Many munis are exempt from federal income tax, as well as state and local income tax, if you purchase the bond in the state where you live,” says Thomas Brock, a chartered financial analyst and certified public accountant at ConsumerNotice.org, in Columbus, Ohio.
Brock adds that credit risk among muni bonds varies, depending on whether the bond is backed by a specific project, making it a revenue bond, or the general creditworthiness of the issuing entity. Those are called general obligation bonds.
“Typically, the former is less risky than the latter,” says Brock. “Regardless, even general obligation bonds are considered safe investments, because of the issuing entity’s ability to raise money through taxes.”
Stable Value Funds
A stable value fund is a low-risk fixed-income security that offers the chief benefit of capital preservation. Don’t look for big price appreciation here. These funds are often available to investors in a qualified retirement plan, such as a 401(k).
“Stable value funds, which are also commonly referred to as money market mutual funds, are a great place to store your liquidity reserve,” says Brock.
He adds that these funds invest in high-quality, short-duration instruments, such as U.S. Treasury bills, commercial paper and CDs.
“Right now, the most competitive funds are yielding over 5%,” Brock says.
Real Estate Investment Trusts
Investors who want to mitigate portfolio risk with dividend income often turn to publicly traded, liquid real estate investment trusts, commonly known as REITs.
REITs are required to return 90% of taxable income to shareholders in the form of dividends.
“REITs offer retirees a way to invest in income-generating properties without directly owning real estate, providing consistent dividend payouts,” says Peter Zabierek, CEO and portfolio manager at Sugi Capital Management in Philadelphia.
“While they carry some market risk, REITs are generally considered a solid choice for long-term investors seeking reliable income streams,” he adds.
Index Funds
By tracking a market index like the S&P 500, index funds spread the risk across numerous companies, reducing the impact of any single stock’s performance. The largest index ETF is the SPDR S&P 500 ETF Trust (SPY).
Other index funds with significant assets under management include the Invesco QQQ Trust, Series 1 (QQQ), which tracks the Nasdaq 100 and the iShares Russell 2000 ETF (IWM).
This inherent diversification of index funds minimizes risk while capturing broad market growth.
Because they simply follow the market, index funds typically have lower management fees than actively managed funds. That helps them outperform actively managed funds in many market cycles.
For retirees, index funds provide steady growth potential with minimal volatility.
High-Yield Savings Accounts
High-yield savings accounts can be a good place to hold cash for an emergency fund or a short-term need. Interest is usually compounded daily and paid out monthly.
“High-yield savings accounts offer a safe place to park cash with better interest rates than traditional savings accounts, though returns are generally modest,” says Ambrose.
As of September, savers can find these accounts with yields as high as 5.5%. Online banks frequently offer higher yields, as their overhead costs are lower than brick-and-mortar banks.
Certificates of Deposit
A certificate of deposit, or CD, is a savings product with a fixed interest for a specific term, such as three months, six months or a year. Investors get the full interest if they leave funds deposited for the entire term.
These are low-risk vehicles that savers can find at online banks, traditional banks and credit unions. Brokerages such as Charles Schwab, Vanguard and Fidelity also offer CDs.
“Generally, these accounts offer much higher interest rates than traditional savings accounts,” says Brock. “However, they require you to lock up your money for varying periods. Early withdrawal usually results in a penalty amounting to a specified number of months of interest.”
Many savers invest in CD ladders; this means they buy multiple CDs of varying maturity dates. This can mitigate interest rate risk and offer access to the funds at set intervals.
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7 High-Return, Low-Risk Investments for Retirees originally appeared on usnews.com
Update 09/13/24: This story was previously published at an earlier date and has been updated with new information.
