Protecting your money is as important as growing it.
That doesn’t sound particularly exciting, but for investors approaching retirement, capital preservation becomes increasingly important. In a market downturn, most retirees don’t want to be making withdrawals from stocks that are trading lower.
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That’s where lower-risk investments play a role: Generating income from their assets allows retirees to hold onto their stocks, rather than liquidating at fire-sale prices.
In addition, income investments provide a ballast against market volatility, even for investors not planning to retire in the next few years.
Here are seven low-risk income investments that can help offset stock market risk, or offer a place to stash money for a short time while earning interest:
— High-yield savings accounts.
— Certificates of deposit.
— U.S. Treasury bonds.
— Treasury inflation-protected securities.
— Investment-grade corporate bonds.
— Municipal bonds.
— Fixed annuities.
High-Yield Savings Accounts
As the name suggests, these accounts offer higher interest rates than standard savings accounts. Savers can currently find rates north of 4%.
“For example, if you put $10,000 in an account offering 4%, you’d earn $400 in interest over a year,” says Steve Sarrel, a CPA at Raines & Fischer in New York.
“This is a solid option if you want low-risk growth for your cash while keeping it easily accessible,” Sarrel says.
He adds that high-yield savings accounts can be a good choice for short-term savings, emergency funds or parking money you don’t need immediately.
“Online banks often offer the best rates and the FDIC insures accounts up to $250,000,” Sarrel says.
Certificates of Deposit
Certificates of deposit are fixed-term savings accounts that offer guaranteed interest rates. The fixed term can range from a few months up to several years.
CDs are a good option for an investor who wants to earn more than a traditional savings account may pay, says Jason Brown, stock market coach and founder of The Brown Report in the Detroit area.
They also hedge against inflation without market risk, Brown adds. CDs are insured by the Federal Deposit Insurance Corp. or National Credit Union Administration, meaning they are protected against bank failures.
“This can give you peace of mind during times of economic uncertainty or a period of war,” Brown says. “However, if you need the money, it is not easily accessible as you have committed for a certain time frame, and if you withdraw early there most likely will be penalties.”
U.S. Treasury Bonds
Treasury bonds are long-term, U.S. government-backed securities that pay fixed interest semiannually. Investors receive the face value of the bond at maturity.
These bonds are similar to CDs, except bondholders aren’t required to hold the investment for a specified period of time. However, to get the full yield, you would need to hold it for the cycle of the bond, Brown says.
For example, if a five-year bond pays 4% interest, you would have to hold it for the entire five years to realize that 4% annual return.
“Bonds are highly liquid. You can easily buy and sell on the secondary market and pull your money out if you need it in an emergency,” Brown says. “This is another low-risk investment that can also be used to hedge against inflation and guarantee monthly payments for retirees.”
Treasury Inflation-Protected Securities
Treasury inflation-protected securities, or TIPS, are U.S. government bonds with principal value that adjusts along with changes in the consumer price index.
The idea is to help buyers maintain their purchasing power over time. When inflation rises, the bond’s principal increases. That results in higher interest payments, since these are based on a percentage of the adjusted principal.
At maturity, investors receive either the original or the adjusted principal, whichever is higher. Conservative investors who want inflation protection and low-risk income might consider TIPS.
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Investment-Grade Corporate Bonds
These bonds are issued by financially strong companies with high credit ratings. They offer steady interest payments and lower risk compared to high-yield bonds.
These investments look attractive right now, says Patrick Kennedy, co-founder of AllSource Investments in Hartford, Connecticut.
He cites the examples of companies like Apple Inc. (ticker: AAPL) and Amazon.com Inc. (AMZN), which have excellent credit.
“We don’t think rates have necessarily settled yet, and therefore we’re keeping our duration short, one to five years, typically,” Kennedy adds.
Municipal Bonds
Municipal bonds represent debt issued by state or local governments to fund public projects. They offer tax-free interest income and are generally considered low-risk, stable investments.
For example, a municipal bond issued by New York City is exempt from both federal and state taxes, which can be a significant advantage for New York residents who are high earners.
An investor who puts $10,000 into a municipal bond paying 4% interest would earn $400 in tax-free interest annually.
The bonds may even be triple-tax exempt, as city residents may not have to pay federal, state or city income taxes on the interest they receive.
A high-income earner in this example could potentially save more than 50% in taxes on municipal bond interest versus interest from a savings account, Sarrel says.
“Although most municipal bonds do not compound, they can be an excellent choice for long-term tax-efficient income, especially for those in high-income tax brackets, as they provide stable returns while maximizing the interest you keep in your pocket,” he adds.
Fixed Annuities
A fixed annuity is an insurance contract that provides guaranteed payments over time. An investor deposits a lump sum or makes a series of payments to earn a fixed interest rate.
These products offer tax-deferred growth and predictable income. Annuities can be controversial, and they’re not right for every investor. However, they are often a sound choice for risk-averse investors who want to protect their principal from market fluctuations.
“These are CD-like with the main difference of being issued by insurance companies versus a bank,” says Nick Bour, founder and CEO at Inspire Wealth in Brighton, Michigan.
“They are generally a little higher-interest-rate than a CD with a longer period of time. Three to 10 years is common,” he adds. If investors withdraw money before that time, they usually incur a surrender charge.
Bour cautions annuity purchasers to understand risks, know what the money is for and have a clear idea of when they will need access to their funds.
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7 High-Return, Low-Risk Investments for Retirees originally appeared on usnews.com
