As you age, it’s generally a good idea to start slowly reducing the risk in your portfolio. When you are young, not only do you have a rising income stream coming from your job, you have plenty of time to recover from any bear markets. But, if you’re at the end of your career or perhaps even retired, your income likely won’t be increasing anymore, and you will have little to no time to bounce back from any selloffs.
This is why seniors should generally have a significant portion of their portfolios in safer investments. But what exactly qualifies as a “safe” investment? While all investments carry risk, here are some best options when looking for safe investments for seniors.
In terms of the risk of loss of capital, U.S. Treasury bills are often referred to as the safest investments in the world. All Treasury securities are backed by the full faith and credit of the U.S. government, meaning it will always pay them off, even if it needs to print more money.
Treasury securities still carry interest rate risk, meaning if you sell them before maturity you may lose money if interest rates have risen. But that is why Treasury bills in particular are extremely safe. They are issued in very short maturities, with the longest being 52 weeks, so interest rate risk is minimized.
Certificates of Deposit
Certificates of deposit don’t carry the backing of the U.S. government in the same manner as Treasury securities, but they are insured by the Federal Deposit Insurance Corporation to the tune of $250,000. Note, however, that this coverage limit applies to all accounts owned by an individual at the same institution. To supplement this coverage, many banks and brokerages carry supplemental insurance as well. Either way, as long as you don’t exceed the coverage limits, CDs are nearly just as protected from default as Treasuries.
High-Yield Savings Accounts
High-yield savings accounts, particularly those issued by online institutions, can often carry interest rates close to or even exceeding those you’ll find with CDs, and they still carry the same type of FDIC insurance. One advantage that savings accounts have over CDs is they don’t have any penalties for early withdrawal, as most CDs do. Before the coronavirus pandemic, withdrawals from savings accounts were limited to six per month, but currently savings account withdrawals are unlimited.
Treasury inflation-protected securities, also known as TIPS, are another form of safe security backed by the full faith and credit of the U.S. government. TIPS have the added security of adjusting their payments based on the inflation rate. Given the current state of inflation in America, which is at its highest in more than 40 years, TIPS seem particularly appropriate for safety-minded seniors.
TIPS adjust their principal based on the rate of inflation every six months while the interest rate remains fixed. However, as the interest rate is paid on the principal amount, payments rise as well in an inflationary environment.
Fixed annuities carry 10% penalties for withdrawals before age 59 ½, so that alone makes these more appropriate investments for seniors. They are guaranteed by the insurance company that issues them, so that generally gives them a relatively high level of safety.
You’ll want to check out the financial status of any company you buy an annuity from before you own it, however. Fixed annuities typically pay interest until you die, no matter how long you may live, so they can help retirees outlive their income. Typically, beneficiaries receive the amount that the owner of the annuity originally paid for it, less any payments already received. Others may have additional death benefits paid to beneficiaries, although they may cost more at the time of purchase.
Money Market Accounts
A money market account is something of a hybrid between a savings account and a checking account. Typically, money market accounts pay interest rates near those of savings accounts, but they also offer more access in the forms of checks and sometimes ATM/debit cards.
Money market accounts are diminishing in popularity thanks to the rise of free checking accounts and high-yield savings accounts, but there are still plenty to choose from. From a safety perspective, money market accounts are also considered deposit accounts, meaning they carry the same $250,000 FDIC insurance as CDs and savings accounts. Most money market accounts do carry higher minimums than other types of accounts, however.
The investment world is filled with different types of risk. Treasuries, CDs and most other conservative investments are often considered “safe” because they have little to no market risk. In other words, they don’t generally trade down in value.
However, all of these types of investments do carry purchasing power risk, which is the danger that your money won’t be worth as much in the future thanks to inflation. This is where a diversified portfolio of high-dividend stocks can help. Stocks in general help mitigate the risk of inflation by providing growth in the value of your investments over time, but dividend-paying stocks have the additional benefit of a rising income stream. This is because most high-dividend stocks have reliable cash flows that increase every year along with earnings. These types of stocks are also generally less volatile than high-growth stocks, which can help mitigate their inherent market risk.
For seniors, preferred stocks are often a better choice than common stocks. This is because preferred stocks pay a much higher dividend than common stocks, and that dividend ranks higher in a company’s capital structure. This means that if a company encounters financial difficulty it must pay off its preferred stockholders before common shareholders receive anything.
In this sense, preferred stocks are somewhat akin to bonds, although they often carry very long maturity dates or even none at all. This does make preferred stocks susceptible to interest rate risk. However, they often pay out relatively high income, and they carry much less market risk than common stocks.
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