5 Investments To Avoid on a Retirement Budget

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If you’re retired, you have inherently less flexibility with your budget than when you were working. This is because you can’t simply ask for a raise or put in some overtime hours to boost your income if times get tight. It’s true that your income may increase with the pace of inflation during retirement if you’re living off a combination of Social Security and personal investment income, as most retirees are.

However, if you run into some unexpected expenses — or portfolio losses — it can be tough to recover quickly. For this reason, it’s essential that you avoid overly expensive or risky investments in retirement. Here are some of the ones that carry red flags for most retirees. 

High-Cost Mutual Funds and ETFs

The great news for investors over the past few decades is that most investment costs have dropped significantly. Zero-commission trading of stocks and ETFs is now the norm, not the exception and the proliferation of no-load mutual funds with low expenses means that any investor can buy quality investments for little-to-no cost. 

Unfortunately, there are still some funds and ETFs that carry high costs. These not only drag down investment returns, but they’re unnecessary out-of-pocket expenses for retirees living on a limited budget. If you want to stretch every dollar you have once you are retired, be sure to choose low-cost investment options.  

Cryptocurrency

Cryptocurrency has been a controversial investment since its inception. While there are plenty of highly publicized stories of cryptocurrency millionaires, there are just as many — if not more — investors that have lost significant sums of money speculating on crypto. As an asset with no intrinsic value and an uncertain future, crypto is by its very nature a volatile investment. While it could certainly trade higher in the future, there’s no real way of knowing and many experts say it could just as easily lose all its value. 

This makes cryptocurrency a dramatically different asset class from stocks, that represent real-world companies with actual products, revenues and earnings. Based on those trends, analysts and investors can assign fair values and project future growth. But cryptocurrency only trades on supply and demand. When investors pile into cryptocurrency, prices can spike dramatically. But the opposite is also true, particularly with smaller or lesser-known cryptos. Shiba Inu, for example, was invented as something of a joke yet soared an astounding 45 million percent over the course of a single year in 2021, as reported by CNN. However, it then reversed dramatically and gave up nearly all of those gains over the following year. This type of volatility should be avoided by retired investors. 

High-Beta Stocks

High-beta stocks are those that are more volatile than the overall market. For example, a stock with a beta of 1.2 moves 20% more than the general market on average. This means if the market falls 10% the stock will tend to drop 12%. While this can be a good thing if you’ve got a long time horizon and the market trends up, it can be devastating if you’ve got a shorter time horizon and the market falls. For this reason, high-beta stocks are not generally appropriate for retirees, as they may not have time to recover from significant losses in their stock accounts. 

Low-Yield Traditional Savings Accounts

While a traditional bank savings account might seem like a good, conservative option for a retiree, it has some drawbacks that are easily avoided. According to the Federal Deposit Insurance Corporation (FDIC), the average annual percentage yield (APY) on a savings account is just 0.46%. But you can get a yield 10 times as much in a high-yield savings account that carries the same FDIC insurance as a traditional bank. 

There are some reasons why you may want to keep your traditional bank account, such as the convenience of having a checking and savings account at the same institution. However, if you’re parking a significant amount of money in that account, such as your emergency fund, you could be losing out on hundreds or even thousands of dollars of interest every year by not using a high-yield savings account.  

Speculative Investments

Even in your working years, it’s advisable to keep speculative investments to a small portion of your overall portfolio, perhaps 5%. But once you’ve retired, most advisors would suggest that you steer clear of speculative investments entirely.

Private equity, penny stocks, alternative investments, limited partnerships and the like are all inappropriate for the average retired investor because they carry a high risk of loss and may be illiquid. At an age when you may not have time to recover from large losses and may have the need to access your capital quickly, speculative investments may very likely cause more harm than good. 

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