7 High-Return, Low-Risk Investments for Retirees
American retirees are gingerly making their way through their golden years, treading forward as all sorts of economic minefields surround them.
They’re showing understandable angst over budget-draining issues like high inflation, soaring consumer prices, fears of Social Security collapsing and a system that arguably has not addressed the financial problems of U.S. seniors living on a fixed income.
Maybe that’s why 63% of Americans are more worried about running out of cash in retirement than dying, according to a new Allianz Life study.
U.S. retirees realize it’s up to them to create a new path to sustained income for the 20 or 30 years some can expect to live in retirement.
That’s where being disciplined and creative about low-risk but potentially high-return investments can help, even as some uncertainty remains.
Maybe that’s why 63% of Americans are more worried about running out of cash in retirement than dying, according to a new Allianz Life study.
U.S. retirees realize it’s up to them to create a new path to sustained income for the 20 or 30 years some can expect to live in retirement.
That’s where being disciplined and creative about low-risk but potentially high-return investments can help, even as some uncertainty remains.
Where can American retirees turn for much-needed income? These seven low-risk but potentially high-return investment options can get the job done:
One mistake retirees and older investors often make is not re-evaluating their investment risk appetite. A money market fund is one asset that reduces risk and still delivers returns. Money market funds typically have high credit quality, short maturities and high liquidity, making them easy to sell to access cash.
Good deals are abundant in money market funds these days. For example, the Fidelity Money Market Fund (ticker: SPRXX) offers a 5.02% seven-day SEC yield as of May 12, with a 0.42% expense ratio and no investment minimum. The Vanguard Federal Money Market Fund (VMFXX) is a government money market fund that pays a seven-day SEC yield of 5.26% with a 0.11% expense ratio, but requires a $3,000 minimum investment.
“Money market funds are historically known for being a low-risk, stable place to keep your cash,” says Maya Sudhakaran, head of growth and acquisition at Plynk, a mobile investment app company. “If you’re looking for something that’s relatively low-risk, easy to access and offers the opportunity for your cash to grow, a money market fund may be right for retirees.”
For low-risk investments suitable for retirees and older investors, Rawitch recommends high-dividend blue-chip stocks.
“These stocks offer stability and regular income,” he says. “By conducting thorough research, it’s also possible to find undervalued stocks with above-average dividends. Along with collecting dividends, there is the potential for stock appreciation if you choose an undervalued company.”
Currently, the well-known stock United Parcel Service Inc. (UPS) offers a 4.4% forward dividend yield, while CubeSmart (CUBE) does even better, with a 4.8% dividend.
Other solid investment options for retirees include bank certificates of deposit, or CDs, which have rates of return hovering around 5%.
“CDs typically have higher interest rates than other deposit accounts, which allows you to lock in a fixed rate for a specific period of time,” says Frank Newman, portfolio manager at Ally Invest in Florham Park, New Jersey. “In contrast, most savings and money market interest rates are variable and often change depending on market conditions.”
You could start with EverBank, which offers a nine-month CD with a 5.05% annual percentage yield and a $1,000 minimum deposit. Marcus by Goldman Sachs has a 12-month CD that pays 5% on a $500 minimum balance, and it also comes with a 10-day CD rate guarantee.
If you think you’ll want to withdraw your money earlier than the CD terms dictate, you could be stuck with paying an early withdrawal penalty, unless you’ve invested in a no-penalty CD. “Consumers should think through all of the available options and their specific financial goals before opening a CD,” Newman advises.
A fixed index annuity is one of the best strategies for generating low-risk cash flow in a volatile economy, some experts say. Once an investor locks in the current rate on a specific income rider on a fixed index annuity, the insurance company must continue to pay that income even if interest rates move lower in the future.
Fixed index annuities can also guard against market losses, thereby maintaining your principal and providing a lifetime guarantee that the income will last as long as the recipient is alive.
“Annuities are a good idea for retirees,” says Paul Tyler, chief marketing officer of New York-based Nassau Financial Group. “A solid annuity will act as insurance against a sudden market downturn. You can also use it to produce an extra guaranteed stream of income you can’t outlive.”
You can buy an annuity from an insurance company, although brokerage firms and fund companies sell them, too. Ask a trusted financial advisor about the best steps forward to land the best annuity for you.
Bond funds are another good income option for retirees.
“This asset class includes high-quality government or municipal bonds,” says Derek Miser, investment advisor and CEO at Miser Wealth Partners in Knoxville, Tennessee. “While the returns of these investments may be lower than stocks, they offer stability, as bonds may be used as a hedge against stock market turmoil.”
Currently, top bond funds are offering robust yields. The Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) delivers a 6% trailing-12-month yield for a low 0.23% expense ratio. The T. Rowe Price High Yield Fund (PRHYX) has a trailing yield of 6.5%, with a net expense ratio of 0.7%.
Bond funds can be purchased through fund companies such as Vanguard, Fidelity and T. Rowe Price. Talk with a financial advisor to help you choose the best funds for your retirement income plan.
In a time of historically high interest rates, some financial advisors are recommending a high-yield savings account tier for 2024 investment portfolios.
“The interest rate environment is attractive enough that these investments can earn meaningful interest with very limited risk,” says Chris Urban, founder of Discovery Wealth Planning in Vienna, Virginia.
Variable rates on high-yield savings accounts are currently above 4% at many banks.
“If you need access to your funds, then go with a high-yield savings account versus CDs,” Urban says. “While it depends on the size of the investment you’re making, the variable interest rate offered on a savings account with immediate access to cash is usually a better deal.”
Top current high-yield savings accounts include CIT Bank’s Platinum Savings account, which offers a 5% yield on a balance of $5,000 or more. CIT also offers a 4.65% yield on its Savings Connect account with a $100 minimum deposit. Another good option is Sallie Mae’s high-yield savings account, which offers a 4.5% return with no minimum deposit.
LendingClub pays 5% on its high-yield savings account, which requires only $100 to open. This account and others come with a debit card and up to $250,000 in deposit insurance from the Federal Deposit Insurance Corporation.
Retirees can also get an income advantage with smart portfolio management. That means finding the right balance of stocks and bonds to meet an income goal. You can start that process by building a “60/40” investment portfolio.
“In a 60/40 portfolio, the stock portion typically consists of a mix of value, growth and dividend-paying stocks,” says Cliff Ambrose, founder and wealth manager at Apex Wealth in Danvers, Massachusetts. “The goal is to balance potential capital appreciation and income generation. Diversifying within these categories and selecting quality stocks with strong fundamentals can help mitigate risk while seeking steady returns.”
The 40% portion of a retiree’s portfolio typically includes bonds, cash equivalents and other fixed-income investments, while the 60% portion is loaded with income-producing stocks. “The 40% of assets provide stability and income generation, serving as a counterbalance to the volatility of stocks,” Ambrose says.
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