Retiree Investments: Unveiling The Unknown Numbers

Many retirees have investments, as they need to supplement their retirement income to cover living costs. In the US, retirees can expect to live for 20 to 30 years after retirement, and with inflation, their living costs could double in less than 25 years.

There are many investment options for retirees, including stocks, bonds, annuities, and property.

High-yield savings accounts

Some high-yield savings accounts even have no minimum deposit requirements, meaning you can start earning interest without needing a large sum of money upfront. For example, as of July 2024, Peak Bank offered a 5.30% APY with no minimum deposit requirements and a $0 monthly service charge.

However, it's important to keep in mind that high-yield savings accounts may also come with minimum deposit requirements, and the interest rates can change at any time. Additionally, not all high-yield savings accounts offer the same level of flexibility in terms of accessing your money. Some may limit the number of withdrawals you can make per month, while others may charge fees for excessive withdrawals.

When choosing a high-yield savings account, it's essential to consider factors such as the interest rate, initial deposit and minimum balance requirements, fees, and compounding interest. It's also worth noting that online banks tend to offer higher interest rates and lower fees than traditional banks, but they may have more limited products and services available.

Overall, high-yield savings accounts can be an excellent option for retirees who want to maximize their savings and take advantage of the high-interest rate environment. By comparing different accounts and considering their features and requirements, retirees can find the best high-yield savings account to meet their needs and financial goals.

Bonds

While bonds are not going to make retirees particularly high returns, they do offer stability and the prospect of some growth. Bonds are the shock absorbers of a retiree's investment portfolio, cushioning the blow of a sharp decrease in stocks.

There are many different types of bonds that retirees can choose from. Here are some of the most common ones:

U.S. Treasury Securities

These are debt instruments issued by the U.S. government and are considered to be one of the safest investments due to their low risk of default. They are also very liquid, meaning they can be easily bought and sold.

Corporate Bonds

Corporate bonds are debt instruments issued by corporations to finance their operations. They usually offer higher interest rates than U.S. Treasury securities but also come with a higher risk of default.

Municipal Bonds

Municipal bonds are issued by state and local governments to finance public projects such as roads, bridges, and schools. They are attractive to retirees because they offer tax-free interest, helping them manage their tax burden better.

Mortgage-Backed Securities

These are bonds that are secured by a pool of mortgages. They can provide a steady stream of income for retirees, but they also come with prepayment and extension risks, which can affect the timing of cash flows.

Foreign Bonds

Foreign bonds are issued by foreign governments or corporations and can provide retirees with exposure to international markets. However, they also come with additional risks, such as currency risk and political risk.

When investing in bonds, retirees should consider factors such as credit quality, duration, and yield. It is also important to note that while bonds are generally considered lower-risk investments, they can still fluctuate in value. As such, retirees should consult with a financial advisor to determine the right mix of bonds and other investments for their portfolio.

Dividend-paying stocks

Retirees should look for companies that can afford to make dividend payments from their free cash flow (FCF). Companies with high FCF tend to have good upside potential and can sustain attractive dividends. It is also important to avoid investing in stocks with high dividend yields that have had, and will likely continue to have, lacklustre performance. For example, AT&T (T) stock is known for its good yield; however, its stock price performance has been poor, falling from about $23 per share in April 2019 to roughly $19 in June 2024.

When choosing dividend-paying stocks, retirees should consider a well-diversified portfolio of 20-40 different stocks across various sectors to minimise risk. Additionally, investing in dividend-paying stocks with a long history of dividend growth can provide a more stable income stream. Examples include Chevron (CVX), with 37 years of dividend growth, and Johnson & Johnson (JNJ), with a 56-year record.

For those seeking a more hands-off approach, mutual funds focused on dividend stocks or dividend-paying exchange-traded funds (ETFs) are a good option. These funds are managed by investment professionals and provide diversification across a range of dividend-paying stocks, reducing risk.

Finally, retirees should be mindful of the tax implications of dividend income, which is typically taxed at higher, ordinary income tax rates.

Real estate rentals

One of the advantages of investing in real estate rentals is the potential for high returns. The relative inefficiency of the real estate market can result in bargains that offer strong returns. Rental income can also be adjusted for inflation by raising rents over time, while expenses such as mortgage payments remain fixed. Additionally, real estate values typically appreciate over time, providing the potential for capital gains if the property is sold.

Another benefit is the tax advantages associated with rental properties. For example, depreciation can be claimed on the building, reducing the property's value and, consequently, the owner's tax burden. Rental property owners can also benefit from the 1035 Exchange, which allows them to avoid paying taxes on the profits from the sale of a property if the proceeds are used to purchase another investment property.

However, there are also challenges to consider when investing in real estate rentals. One of the main barriers to entry is the knowledge and skill required to successfully invest in rental properties. It is crucial to understand cash flow calculations, deal-finding, property management, tenant screening, and more. Additionally, real estate rentals require a high minimum cash investment, typically needing a down payment of 20-30%.

Furthermore, real estate is infamously illiquid, making it challenging to convert investments back into cash quickly. The process of buying and selling properties can be time-consuming and costly, involving various closing costs and due diligence procedures.

Overall, while real estate rentals can provide a stable income stream and offer diversification benefits, it is important to carefully consider the challenges and ensure a thorough understanding of the process before investing.

Certificates of deposit

CDs are great for retirees because they force you to save a certain segment of your money for later in life, and you earn interest on top of that. Just make sure you can go without the money for the entire term, as you'll face steep penalties if you take out the money early.

CDs are one of the safest ways to invest your money. First, their rate is fixed and guaranteed. Second, CD investments are protected by the same federal insurance that covers all deposit products. The Federal Deposit Insurance Corp. (FDIC) insures bank accounts, and the National Credit Union Administration (NCUA) insures credit union accounts. In both cases, up to $250,000 of your funds are protected in the rare event that the institution fails.

CDs are an attractive option for savers who want to earn more than most savings, checking, or money market accounts without taking on more risk. They are a safer and more conservative investment than stocks and bonds, but offer a lower opportunity for growth.

When opening a CD, you'll generally want to consider the interest rate, term, principal, and financial institution. The interest rate is usually fixed, though there are variable-rate CDs that could earn a higher return if rates rise. The term is the length of time that you agree to leave your funds deposited to avoid any penalty. The principal is the amount that you agree to deposit when you open the CD. The financial institution, such as a bank or credit union, will set factors such as early withdrawal penalties and whether your CD will default to being automatically reinvested at maturity.

You can find CDs at banks, credit unions, and brokerages, with terms ranging from 3-, 6-, or 12-months to 4-, 5-, and even 10-year terms. The top CD rates can be three to four times higher than the national average rate.

Frequently asked questions