As you transition from a career to full-time retirement, your investments should shift away from volatile growth toward more stable returns. However, investors should not entirely abandon investing for growth in retirement. Those who retire in their 50s or 60s may have decades to live. Stocks should remain a part of a balanced portfolio.
As you age, you'll have less appetite for dramatic asset fluctuations and more need for reliable income. Here are seven ideas for transitioning to more stable returns and reducing investment risk in retirement.
CD ladder. The most conservative place to keep your money is in cash or a cash equivalent savings vehicle. But if your money is in a checking or low-interest savings account, you'll lose money to inflation over time. Now that the Federal Reserve is raising rates, interest on savings accounts and certificates of deposits are the highest they've been in about decade.
To take advantage of the higher rates, retirees can maintain liquidity while maximizing earnings on cash by creating a CD ladder. Instead of investing all your cash in a savings account or money market fund, you can earn more by investing equal amounts of cash in a staggered series of CDs over a period of three to five years. CDs with longer maturities will pay higher interest rates while shorter-term CDs are more liquid.
For example, you could invest $5,000 in a one-year, two-year, three-year, four-year and five-year CD. Also, maintain enough cash in a savings account for the current year. At the end of the first year when the first CD matures, you can either spend the money or reinvest it in another CD at the longest maturity in the ladder. Shop around to find banks that pay the best rates. Online banks typically pay higher rates than traditional banks and credit unions.
Tax-exempt mutual funds. Higher tax bracket investors can use tax-exempt mutual funds to help lower tax liabilities outside of tax-advantaged accounts. The investments in these funds are typically government or municipal bonds, which are exempt from federal taxes and sometimes taxes in your state of residence.
Returns on tax-exempt mutual funds are lower and more stable because of the tax advantages and relative safety of the funds. Since municipal bonds are based on a pool of geographically diverse debt investments, the returns are less correlated to daily market fluctuations, further diversifying and stabilizing your overall portfolio.
Rental properties. Real estate investing comes in many forms, many of which provide a stable income stream for supplemental or retirement income. Rental properties are a good option for those who prefer tangible assets. Properties purchased at a discount with little or no debt will provide stable monthly income as long as you can find good tenants.
High quality housing in desirable locations and neighborhoods attracts the best tenants. Many retirees are intimidated by the prospect of managing a rental, but real estate management companies can handle this for you. Aim to invest in rental properties with healthy cash flow numbers. Avoid speculative investments reliant upon market appreciation.
Bond ladder. A bond ladder works the same as a CD ladder, but gives you a more diverse pool of investments to choose from. Bond ladders create a predictable, yet flexible income stream. Once a bond matures, you can reinvest the money further out the timeline or spend the proceeds. Most full-service and online brokers can help you create a bond ladder with online tools or personalized help from an adviser. If you choose to build a bond ladder in lieu of purchasing a bond fund or ETF, be sure to properly diversify your bond selections with varying underlying assets, interest rates and maturities.
Balanced mutual funds. Many retirees remain invested in stocks to achieve their targeted portfolio returns. But most people also prefer to lower portfolio volatility later in life to help sleep soundly at night. Balanced mutual funds invest in both equities and bonds, making them less volatile than the overall stock market. The mix of stocks and bonds varies by fund.
The investment mix in a managed balanced fund changes based on the manager's assessment of market valuations, and you pay a higher expense ratio for this added feature. If you prefer lower-cost index funds, passively managed balanced funds are also available. Look for no-load funds with low expense ratios and reputable managers.
Low-volatility ETFs. Another way to invest in stocks while limiting severe undulations in your portfolio is to invest in a low-volatility ETF. Low-volatility ETFs should, by design, fluctuate less than the overall market. The least volatile stocks are typically mature and stable companies, such as utilities, consumer staples and industrial stocks that often pay dividends. Over the long-term, low-volatility ETFs are likely to underperform the S&P 500 index, but retirees might appreciate the reduced volatility.
U.S. savings bonds. Considered one of the safest investments for your money, U.S. savings bonds are a reliable source of stable returns. Due to the historically low interest rates over the past decade, U.S. savings bonds have been out of favor for individual investors. But they are an increasingly appealing investment vehicle for retirees as rates increase.
Treasury bills, notes and bonds are loans you give to the U.S. government to help bridge the gap between tax receipts and the annual federal budget. Since the investments are guaranteed by the U.S. government, your money is safe. Savings bond terms range from four-week bills to 30-year bonds. Generally, the longer the term of the security, the higher the return. U.S. savings bonds can be purchased directly from the government through TreasuryDirect.gov, through a bank or broker or via mutual funds or ETFs.
Craig Stephens is a blogger at Retire Before Dad.
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