4 Investments Retirees Should Avoid Plus the Best Stocks to Own on Social Security
Written by
G. Brian Davis
Edited by
Angela Corry
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Some investments work wonders during the “wealth accumulation” phase of your life. But as you near and enter retirement, your mindset and strategy should shift to wealth preservation and income.
Watch out for these investments retirees should avoid — and a few stock investments to keep holding on Social Security.
Indexed Universal Life Policies
Insurance brokers push these policies hard because they pay high commissions, but they’re complex, expensive and ultimately not useful for most retirees. Sold as life insurance with S&P-linked growth, that sells pitch is inherently deceptive.
. “Premiums quietly balloon with age to cover that ‘insurance’ part, which most never read. Front-loaded fees will stack up, and the math doesn’t hold.”
Leveraged Funds
Leveraged funds borrow money to help amplify the returns on any given day. That looks great on days when the market surges up 2% and the leveraged fund pops up to 8%. It’s less fun when the market moves the other way.
Stock trader and investor Vince Stanzione warns retirees to steer clear: “Retirees should avoid leveraged ETFs, which are aimed at short-term traders like me.”
Individual Stocks
While an index fund can’t drop to zero (short of a zombie apocalypse), individual stocks can. Retirees should leave individual stock investments to younger investors who can stomach greater risk, and who don’t mind continually keeping up with the news about these specific companies.
That goes doubly for stocks driven up by speculation. “Watch out for meme stocks or tips from your neighbor,” adds Stanzione. “That’s more akin to gambling than investing.”
Directly-Owned Rental Properties
Buying, renovating, managing and holding rental properties makes a great side business for working adults. Rentals can generate strong income, and appreciate over time even as your renters pay down your mortgage.
Many novice real estate investors underestimate just how much work is involved however. Tenants damage your property or stop paying the rent, requiring you to go through the costly and onerous eviction process. Properties need ongoing maintenance and repairs, often costing thousands of dollars at a time. Even good tenants eventually move out, requiring a labor-intensive — and expensive — turnover.
That says nothing of the risk of lawsuits either. Remain a landlord long enough and you’ll get sued by a litigious tenant or neighbor. Worst of all, their attorney will name you personally in the lawsuit even if you own the property under a legal entity, which means a winning plaintiff could come after all of your other assets. It falls to you to convince the judge that you shouldn’t be named personally in the suit.
Stocks to Own on Social Security
Start with a broad market fund that gives you broad exposure to the market at large. “Stock index funds, such as those mirroring the S&P 500, reduce risk compared to investing in individual stocks,” explains Dr. Brandon Parsons, economist at Pepperdine Graziadio Business School. Try SPY for a fund that mimics the S&P 500, or VTI for a total U.S. stock market fund.
Also consider adding a fund for broad exposure to international stocks, such as VEU. That too helps diversify your stock investments.
If you must include a few individual stocks, aim for blue-chip stocks that have been around for decades and pay high dividends.
Stanzione recommends holding a fund or two with precious metals. “Gold and silver ETFs help protect against inflation and the weaker US dollar. Try GLD and SLV as low-cost funds.”
If you want to include a little real estate to your portfolio, consider investing in REITs or joining a co-investing club that goes in on passive real estate investments together.
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