Planning for retirement is a delicate balancing act. While you’re still working, you have to be aggressive enough to generate some significant gains in your account if you’re looking to enjoy a comfortable retirement. But after you finally stop working, you’ll generally want to downgrade your risk a bit.
So for baby boomers without a reliable source of income from a job — and with less time to recover from any losses — it’s prudent to avoid certain investments that could potentially cost you that happy retirement you’ve worked so hard for. Here are some of the riskiest options that you might want to avoid.
Crypto is too speculative for most investors in general, let alone retirees. While proponents claim that cryptocurrencies like bitcoin are the wave of the future, one of their primary defining characteristics thus far is extreme volatility.
From July to December of 2017, for example, the value of bitcoin rose from about $2,300 to more than $17,000, before plummeting once again to about $3,200 by Dec. 2018. By Nov. 2019, bitcoin had hit an all-time high of nearly $67,000 before losing nearly half its value by Jan. 2021, on its way to another short-term low below $17,000. While some traders certainly made money during these huge swings, many others got taken to the cleaners. This type of volatility means that boomers should avoid devoting all but the smallest portions of their retirement portfolios to cryptocurrencies, even major ones like bitcoin or ethereum.
Retirees are often told they should allocate a significant amount of their portfolios to income-generating investments. Junk bonds, with their high yields relative to most other income options, may entice some boomers looking to juice up their retirement returns.
The problem with this strategy is that junk bonds by definition are low-quality investments. The reason they pay such high yields is to compensate investors for the risk they are taking. In other words, junk bonds are much more likely to default than higher-quality corporate bonds, making them too risky for most boomer portfolios.
Although you can mitigate the risk of an individual bond default by investing in a junk bond mutual fund, you’re still taking on capital risk. Rising interest rates can take a junk bond mutual fund’s net asset value, while rising default rates — which might occur during the next recession — can also damage your principal value.
Meme stocks have garnered a lot of headlines in recent years for their huge gains — and crippling losses. Companies like AMC Entertainment and GameStop have been trading more on the momentum of recreational traders piling into and out of the stocks than their inherent economic value.
While it can be tempting to dabble in meme stocks in an effort to make a quick buck, one wrong move and you could find a significant amount of your retirement portfolio wiped away in the blink of an eye. When you’re just starting out, with a career of rising earnings ahead of you and time to recover from a significant selloff, you may be able to afford owning or trading a few meme stocks. But when you’re retired, living off a fixed income and without the luxury of waiting out any stock meltdowns, you’ll want to avoid them.
Aggressive Growth Stocks
Even in retirement, you will likely need some amount of growth in your portfolio. After all, the average 72-year-old still has a distribution period of 27.4 years, according to IRS tables, so most boomers should prepare for a multi-decade retirement.
As inflation eats away at the value of fixed-income investments, most advisors suggest having at least some allocation of stocks even in a retiree’s portfolio. But you’ll want to pick your equities carefully — if you load your retirement account with speculative, aggressive growth stocks, you’re taking a huge risk that at some point you will suffer a big drawdown. This is the type of risk you should try to stay away from in retirement.
High fees are the bane of any investor, but they’re particularly damaging if you’re living off a fixed income in retirement. While you may be able to afford paying some extra fees if you have a portfolio that could generate gains of 20% or more — although you shouldn’t — when you’re struggling to earn 5% or 6% off a fixed-income portfolio, a 1% or 2% annual fee could wipe out 33% or more of your earnings.
This is the type of unreasonable fee structure that could seriously reduce your quality of life in retirement.
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