Baby boomers face bigger challenges in retirement than the previous generation. Fewer boomer-aged workers have pensions today — only 13 percent, according to Pew Charitable Trusts — which means the burden is on the individual to plan for retirement. Furthermore, longer life spans and rising healthcare costs can strain a retirement budget.
To sustain a comfortable standard of living in retirement, boomers should look to low-cost investments from trusted brokers that offer regular returns and tax advantages while minimizing short-term risk. But not every investment will be the right choice for every boomer.
“Investments that are safe to one person may not be for another,” said Patrick Hejlik, vice president of First Republic Investment Management, who has worked with baby boomers transitioning from pre- to post-retirement. “It really depends on how long they need the assets to work for them, how close to retirement they are, health status and risk tolerance.”
Making sure you have the best retirement account with low fees and a diversified portfolio is the first step to a successful investment strategy. By creating a diverse mix of the following safe investment options, you can enjoy security and build a sizeable retirement nest egg.
Safe Investment No. 1: Index Funds
Index funds are safe investments that are also aggressive enough to provide strong returns. These funds are a type of mutual fund constructed to match or track the components of a market index, such as the S&P 500.
Paul Ruedi, CEO of Ruedi Wealth Management, Inc., recommended investing in index funds as they offer risk-reducing diversification at a low cost. The hands-off nature of index funds allows operating expenses to remain low. The average index fund fees come in around 0.17 percent, compared to the average 0.75 percent fees on actively managed funds, according to Morningstar.
When considering relative costs and returns of investments you can choose for retirement, index funds steadily outperform their actively managed counterparts. “Index funds allow an advisor to create the most reliable financial plan,” said Ruedi. “Actively managed funds must increase uncertainty by their very nature — they can and usually do underperform.”
Ruedi recommended the Vanguard Total Stock Market (VTSMX) Index Fund for boomers’ equity allocation; it provides a low-cost, safe investment option with a reliable delivery of return.
Safe Investment No. 2: ETFs
Exchange-traded funds (ETFs), like index funds, track indexes. But unlike index funds, ETFs tend to have more options and greater liquidity. ETFs also have low expense ratios, with some brokerages like Charles Schwab and TD Ameritrade offering select ETFs commission-free, reducing expenses even further for cost-conscious boomers.
ETFs are also a safe investment strategy that can serve boomers’ interests. These funds can be traded on an exchange like stocks, allowing boomers to get invested in a variety of asset classes — stocks, bonds, real estate — without having to shoulder the expense of trading each stock individually.
Safe Investment No. 3: Blue-Chip Dividend Stocks
Mike Scanlin, CEO of investment software company Born To Sell, recommended boomers invest blue-chip dividend stocks. Many of these large, stable company stocks — like Johnson and Johnson, Walt Disney and PepsiCo — pay dividends.
Blue-chip dividend stocks are not only attractive to boomers because of the regular income they provide; they’re appealing because of their overall performance. Over the last four decades, dividend stocks have outperformed the S&P 500, reported The Street.
Buying stocks individually requires paying a transaction fee with each buy and sell. To keep costs low, compare fees at various brokerages and make sure your predicted gain will be more than enough to cover the transactional costs — about $5 to $10 at discount brokerages.
Safe Investment No. 4: Peer-to-Peer Lending
For boomers already holding a great deal of their portfolios in the stock market, Jeff Rose, a certified financial planner and owner of investing blog Good Financial Cents, recommended safe investing through peer-to-peer lending.
“Sites like Lending Club and Prosper give you the opportunity to invest in loans to people and small businesses while giving you credit and investment risk information. You can invest as little or as much as you want into any one ‘note,’ allowing you to diversify inside of the peer-to-peer lending network,” said Rose. In addition to Lending Club and Prosper, Forbes also recommended Upstart and Funding Circle.
Joseph Hogue, a chartered financial analyst and founder of personal finance blog PeerFinance101, also recommended peer loan investing for boomers.
“[These loans] are not closely correlated with stocks, providing some protections from market ups and downs,” he said. “Since peer loans pay off completely over the life of the loan (three to five years), they provide more cash flow than traditional bonds that only pay interest until they mature.”
Safe Investment No. 5: Annuities
Since very few boomers have pensions, CFP Shannon Ryan recommended annuity products for conservative boomers who’d like a “guarantee” of an income they cannot outlive. An annuity is an investment vehicle sold through an insurance company and one of the few investments that guarantees returns.
“Annuities are more expensive than many investments and do typically have a surrender fee schedule in the first 10 years,” said Ryan. “But when used appropriately in a balanced portfolio, they can add some confidence to the stability of income.”
Annuity costs vary depending on their structure, requiring careful review. In choosing an annuity, financial advisor Shannon McLay of Financial Gym said the primary feature that you should look at when determining the best annuity for them is the guaranteed component. “As long as the guaranteed payment is a number that would meaningfully contribute to [your] other regular retirement income, then it will work in [your] overall retirement strategy,” she said.
Safe Investment No. 6: Certificates of Deposit
Another option for conservative boomer investors are certificates of deposit. When you put your money into a CD, you agree to leave your money with the bank for the term specified on the certificate. In return for that time guarantee, the bank pays you a higher rate of interest than a typical savings account. Generally, larger deposits and longer timelines translate to better rates.
CDs don’t carry costs, but they do incur penalties if the money is withdrawn prior to maturation — which can range from a few months to a decade, depending on the CD.
Boomers looking to benefit from higher rates while still maintaining liquidity can use the laddering technique, whereby various CDs of differing rates and maturities are purchased so that investors can access their money at different times. Boomers can also try to arrange to have interest paid out quarterly or semi-annually to maintain increased liquidity.
“CDs are great for short-term goals and for any money you might need access too soon,” said Matt Becker, founder of Mom and Dad Money, a fee-only financial practice. Becker recommended local credit unions and online banks like Ally or Barclays for the best rates.
He does, however, caution against boomers keeping too much of their nest egg in these conservative vehicles.
“The issue with CDs and savings accounts for long-term goals is that they will almost certainly lose value due to inflation,” he said. “That’s why it pays to be a little bit more aggressive with your long-term savings.”
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About the Author
Stefanie O’Connell is a financial expert, Gen Y advocate, speaker and author of the book, “The Broke and Beautiful Life.” Dedicated to helping young adults achieve financial greatness, her work has been featured in The Wall Street Journal, Forbes, SUCCESS magazine, MONEY.com, The Dr. Oz Show, Fox News and ABC World News.