Are there any safe investments in retirement? Asking that question is a lot like asking if you can eat all the junk food you want and never gain any weight. Investments have risk just like junk foods have tons of calories.
The stock market goes up and it goes down. Then it goes back up again. And then, well it’s a lot like washing your hair: wash, rinse, repeat, and so on. You get it. So, is there really such a thing as safe investments in retirement?
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The Stock Market
When most of us think about investments, we think of the stock market. Stocks are predictably very unpredictable. And yet, every time anyone talks about them, they always talk about the roller-coaster twists and turns they take and actually seem surprised when there’s an especially big rise or dip in the market. You shouldn’t be it happens all of the time.
The average investor gets a little dizzy and queasy about all of that rising and falling and then they start thinking about moving their hard-earned money to something safer when things get especially scary. That’s really true for anyone who is an investor during retirement.
OK, hold on to your chair and take a deep breath. In simple terms, all investments have some kind of risk so the answer to the question about any safe investments is a simple no.
But the good news is that some risks may be considered safer risks than other risks. There’s more than one kind of risk.
What Is Risk?
Risk is the possibility of something bad happening. In this case, it’s with your money. Risk involves uncertainty, so yes, it means you can lose money. That’s a very undesirable consequence when that involves your retirement funds. That scares most of us to death.
We all want to avoid risk, but when you are younger and still earning an income from a job, you have more “risk tolerance” and so you can take more chances when it comes to investments. Every single successful investor who has ever increased his wealth has taken some risks and probably even high risk when they were younger.
Advisors you talk to about investments will always survey you about your risk tolerance and confirm it with you. If they don’t do that, run from them and head for the hills.
When it comes to a retiree’s risk tolerance, most will fall into the category of “extremely low risk tolerance”. When retired, you usually always look for low-risk ways to increase your income.
Are You Ready for Those Golden Years?
The sooner you start preparing for your retirement, the easier the question is to answer. I literally have said thousands of times when giving my unofficial retirement advice that the time to start thinking about and planning for your retirement is the day you begin your very first job! Of course, almost no one does that, but you’d be shocked to learn how much good that it will do you in so many different ways if you did.
It gives you the time to learn and execute a real retirement plan. Risk taking is easier and correctable when a mistake actually happens. You get smarter and more successful investing and then you can actually see yourself sipping wine by the pool or hopping into your RV and traveling around the country one day.
Increasing Your Income When You No Longer Work?
Short of taking on a new job in your retirement, most of us won’t wake up the day after we retire with an increase in our incomes. But there are ways to boost your financials without having to actually work and it does have to do with investments.
There is a low-risk way to earn a check every month without having to do any work. It’s called dividend income.
One of the first things most new investors hear is that dividend stocks are a wise option. Generally thought of as a safer option than growth stocks or other stocks that don’t pay a dividend, dividend stocks usually will occupy a few spots in even the most novice investors’ portfolios. Recommendations are to pick a portfolio of proven dividend stock winners that can pay you regularly and make you an income.
But, like all investments, dividend stocks come in all shapes and colors, and it is important to not paint them with a broad-brush stroke that they are very safe!
What Bad Things Can Still Happen?
Investors look to dividend-paying stocks to generate income and also add to capital growth.
A high dividend yield, however, may not always be a good sign since the company is returning a chunk of its profits to investors (rather than growing the company) when it issues dividends.
When you own dividend stocks, you may receive regularly scheduled dividends such as every quarter. Not all companies pay dividends though and if a company gets into financial trouble it can cut or stop them. So, they do have market risk. In other words, stock prices sometimes plunge, which could wipe out any of the gains you might get from the dividends.
That’s why retirees who buy stocks for dividend income should limit their exposure to this strategy and stick with a few large, stable companies with a long history of paying dividends. There are many of those that have been paying dividends regularly and with increases annually in those payouts for decades despite the crazy ups and downs of the stock market. It’s one of the best ways that you can find a safer retirement investment.
There are mutual funds that also issue dividends, but they are not issued regularly the way that stocks do, and therefore are not as desirable. Those funds are known as ex-dividend funds and they declare periodic dividends to shareholders who own the fund as of a certain date. After that date, the fund is said to be trading “ex-dividend” (literally, without the dividend). An investor who buys shares during the interval between the record date and the payment of the dividend does not receive the dividend. A fund that’s in the ex-dividend period is marked with an “x” in newspaper listings.
Other Financial Strategies to Produce Income with Lower Risk
Social Security is a key source of steady cash in retirement and some retirees also have traditional defined-benefit pensions, too (although an increasingly rare benefit these days). So, the question is: is it that enough for you? Probably not, even though you may think that Social Security will be your support in retirement.
Besides dividend income, here are my best takes to increase your retirement income and reduce your risk!
It’s possible to tap into the equity in your home for income, either by selling the home or by taking out a home equity loan, home equity line of credit, or a reverse mortgage. However, relying too heavily on the value of your residence to fund your retirement can be risky and dangerous, because home values could drop suddenly (like in 2008) and reduce or wipe out your home equity. It might be better to think of home equity as a backup plan and not a primary plan.
Real Estate That Produces Income
Retired or not, it’s nice to get a check each month when you rent out a home or sell one to someone and hold their mortgage (just like a bank does). But there is a risk when the renter or homeowner doesn’t pay you. That leaves you the landlord on the hook for property taxes, maintenance costs, legal fees, and mortgage payments when that happens.
If you like real estate but aren’t into being a landlord or mortgage holder, consider investing in equity REITs, which buy, sell, and manage commercial properties such as malls and apartment buildings.
REIT shares can be purchased indirectly through mutual funds, which contain a basket of securities. REITs often pay high monthly or quarterly dividends and are risk reduced.
Immediate Fixed Annuities
If you want income with the predictability of Social Security or a pension, you might go to an insurance company and buy an immediate fixed annuity (steer away from variable annuities). This is a contract for a guaranteed income stream for a specified time or even the rest of your life.
As “immediate” suggests, the insurer starts paying you almost right away, usually the month after purchase and every month thereafter.
One risk with an annuity is that you might not live long enough to collect a sufficient number of payments to justify the investment. You can check into a guaranteed annuity that can go to your beneficiary if you die prematurely at a guaranteed term, but of course that will pay less every month.
A fixed annuity also subjects you to the risk of inflation, especially if it will still be paying out many years from now (say 20 years). The good news for an immediate fixed annuity is you have “guaranteed” income/cash flow for life. The bad news is that you don’t know what that “guaranteed” income will be worth and that’s a risk to consider.
Bonds represent debt. So, if you buy a bond, it means somebody owes you money and will be paying you interest on it. The safest bonds, those issued by the federal government, government agencies, and financially-sound corporations can be a dependable source of retirement income. One smart approach to bond investing is to build a portfolio of different maturities, using a technique called laddering.
CD’s – Certificates of Deposit
In some cases, CD’s are a good safe insured way to “protect” your money. I say protect because in most markets, growth isn’t happening such as the one we find right now. Rates in many cases are down to 0.01% no matter how much you have to invest. The risk here is that your interest may not keep up with inflation, and that may actually be true for years to come.
Final Thoughts on Are There Any Safe Investments in Retirement?
In retirement you don’t want to have to worry every minute of the day about market risks, do you? That makes retirement seem like work and if those words are ever in the same sentence, then it can’t be a good thing. That’s why planning way ahead to reduce risk and focus on safe investments spells a much more pleasant retirement.
Do you have a retirement plan set up now? Have you thought about what you will need to live on in the lifestyle you want after you stop working? Are dividends a part of your retirement strategy? What is your risk tolerance and are you worried about your finances as you approach retirement?
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Gary Weiner writes about personal finance at Super Savings Tips. Now retired, he’s spent the past 50 years working in retail (department stores and supermarkets) and financial planning.