Retirement Reinvented: Exploring The Best Investment Strategies

There are a variety of investment options for retirees to consider, each with their own benefits and drawbacks. Here are some of the most common and recommended investments for retirees:

- High-yield savings accounts: These accounts offer a higher interest rate compared to traditional savings accounts, allowing retirees to earn more on their savings while keeping their money accessible and low-risk.

- Bonds: Bonds can provide a stable and relatively low-risk source of income for retirees. Government bonds, such as Treasury Inflation-Protected Securities (TIPS), are considered safer investments, while a diversified bond portfolio can offer higher yields.

- Annuities: Annuities provide a guaranteed income stream, which can be particularly appealing to retirees. However, they may be subject to inflation risks and lack liquidity.

- Dividend-paying stocks: Stocks can be a risky investment for retirees, but some stocks, such as defensive stocks (e.g., utilities, telecommunications, consumer staples, and healthcare), offer more stability and regular dividends.

- Real estate: Investing in rental properties or Real Estate Investment Trusts (REITs) can provide a solid source of income, but it requires more active management and comes with additional responsibilities and risks.

- Certificates of Deposit (CDs): CDs are a low-risk investment where individuals deposit a sum of money for a fixed term and earn interest. This option ensures retirees save for the long term while earning returns.

High-yield savings accounts

• My Banking Direct: 5.45% APY
• UFB Direct: 5.25% APY
• Bread Savings: 5.15% APY
• Bask Bank: 5.10% APY
• Popular Direct: 5.05% APY
• EverBank: 5.05% APY
• CIBC U.S.: 5.01% APY
• Salem Five Direct: 5.01% APY
• LendingClub: 5.00% APY

While high-yield savings accounts offer higher interest rates than traditional savings accounts, there are a few things to keep in mind. High-yield savings accounts typically have variable interest rates, which means the APY can change at any time. Additionally, some high-yield savings accounts may have minimum deposit requirements or monthly maintenance fees, so it's important to read the fine print before opening an account.

Low-risk investments

High-Yield Savings Accounts

High-yield savings accounts are a great way to generate modest returns on your money. While not technically an investment, these accounts offer higher interest rates than traditional savings accounts, and your money is easily accessible. The Federal Deposit Insurance Corporation (FDIC) insures most accounts for up to $250,000, so your money is safe even if the financial institution fails. However, inflation can erode the purchasing power of your savings over time.

Money Market Funds

Money market funds are mutual funds that invest in short-term, low-risk assets like Treasury and government securities, commercial paper, or municipal debt. They are typically less volatile than other types of mutual funds and offer diversification and liquidity. You can purchase money market funds from brokerages or fund companies, and they are a good option for those seeking stable, liquid investments.

Treasury Securities

Treasury securities are backed by the US government and come in three types: bills, notes, and bonds. Bills mature in one year or less, notes can span up to 10 years, and bonds typically mature in 20 to 30 years. When you purchase Treasury securities, you are lending money to the US government, and you will receive your initial investment back, plus interest, at the end of the term. Treasury securities are a safe investment option, but they typically pay lower interest rates than other securities.

Bond Mutual Funds and Exchange-Traded Funds (ETFs)

Bond mutual funds and ETFs pool different bonds together, allowing for easy diversification. They are often managed by professionals and can provide liquidity since you are not constrained by a maturity date. However, there may be initial sales charges and management fees, and the value of these funds can fluctuate based on market conditions.

Deferred Fixed Annuity

A deferred fixed annuity is issued by insurance companies and provides a guaranteed rate of return over a set period, typically 3 to 10 years. Your investment grows tax-deferred, and there are no IRS contribution limits. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company, and while there are no upfront sales charges, there may be penalties for early withdrawal. Deferred fixed annuities are well-suited for those approaching or in retirement who value principal guarantees and competitive interest rates.

Dividend-paying stocks

When choosing dividend stocks, it is important to remember that not all dividend stocks are created equal. Some have higher yields than others, and some have greater potential for price appreciation. High-yield dividend stocks usually come with an elevated sense of risk, so striking the right balance is crucial for retirees.

• Johnson & Johnson (JNJ): A drugmaker and consumer goods giant with a diversified recession-resistant business and a strong balance sheet. JNJ has a long record of dividend growth and pays a decent dividend yield.
• Chevron Corp. (CVX): An integrated oil and gas company with a strong presence in the Permian Basin. It has a history of consistently increasing dividend payouts and offers a healthy dividend yield.
• Visa (V): A data network company that generates revenue by taking a small cut from payment transactions. It has high free cash flow margins, allowing it to easily cover dividend payments and providing potential for stock price appreciation.
• Microsoft (MSFT): A global software company with a strong market share and free cash flow margins. Microsoft has consistently increased dividends and has the potential for significant stock price gains.
• Lockheed Martin (LMT): An aeronautics, defence, and space technology company with a strong backlog of orders. Lockheed Martin has a history of annual dividend increases and offers a decent dividend yield.
• Domino's Pizza (DPZ): The largest pizza company in the world, generating significant and consistent free cash flow. Domino's Pizza has the potential for dividend hikes and share buybacks, making it an attractive option for retirees.

Income-producing property

Income-producing properties can be a great way to supplement your retirement income.

One of the biggest advantages of investing in real estate is the potential for high returns. The real estate market is relatively inefficient, so it's possible to find excellent deals that offer strong investment returns. Additionally, if you can manage the property yourself, you can further increase your income.

When considering investing in an income-producing property, it's important to choose a good location over simply looking for the cheapest property. You should aim to earn about 8% per year on your investment after costs. It's also crucial to remember that there are recurring expenses associated with owning a property, such as maintenance and marketing costs, as well as vacancy periods.

If you plan to finance your purchase with a mortgage, it's best to do so before you retire. Mortgage lending guidelines typically require a steady employment history, and you may need to make a substantial down payment if you don't plan to occupy the property.

Investing in income-producing properties also comes with certain risks. For example, you may encounter renters who fail to pay or have difficulty finding tenants. Additionally, being a landlord requires dealing with a variety of personalities, so it's important to screen potential tenants thoroughly.

Before making any investment decisions, it's always recommended to consult with financial professionals, such as a CPA, real estate attorney, and insurance agent, to ensure you fully understand the financial feasibility and potential risks involved.

Certificates of Deposit

CDs are similar to opening a standard bank deposit account. When shopping around, consider these factors:

• Interest rate: Most CD interest rates are fixed, though there are variable-rate CDs that could earn a higher return if rates rise.
• Term: This is the length of time that you agree to leave your funds deposited to avoid any penalty (e.g. 6-month CDs, 1-year CDs, etc.). The term ends on the maturity date, when your CD has fully matured and you can withdraw your funds penalty-free.
• Principal: This is the amount that you agree to deposit when you open the CD.
• Financial institution: The bank or credit union where you open your CD will set factors such as early withdrawal penalties (EWPs) and whether your CD will default to being automatically reinvested at maturity.

CDs offer fixed interest rates that are often higher than the rates on other bank accounts. Generally, the longer the term, the higher the rate. CDs are an attractive option for savers who want to earn more than a typical savings or money market account without taking on more risk.

CD rates

CD rates are largely determined by the Federal Reserve's rates, as the Fed's decisions directly affect a bank's costs. The higher the federal funds rate, the more interest you can earn on a CD.

CDs can be a good idea if you have cash that you don't need now but will want within a few years. They can help you save for a vacation, a new home, or a car. CDs may also be a good idea if you want to invest some of your savings more conservatively.

Pros of CDs

• Rates are typically higher than savings or money market accounts.
• A guaranteed, predictable rate of return is less risky than volatile stocks and bonds.
• Federally insured if opened with an FDIC- or NCUA-insured bank or credit union.
• Can help you avoid spending temptations since withdrawing funds early triggers a penalty.

Cons of CDs

• Penalties for withdrawing funds early.
• Typically earns less than stocks and bonds over time.
• A fixed rate could cost you if interest rates rise during the term.
• Inflation can eat away at the value of money locked in at a fixed rate.

Frequently asked questions