Investment Exploration: Uncovering Alternative Strategies Beyond Retirement Planning

There are several investment options for those not saving for retirement. These include:

- High-return, low-risk investments such as bank certificates of deposit, high-yield savings accounts, and a 60/40 mix of stocks and bonds.

- Fixed annuities, which are a type of insurance contract that can supplement retirement savings.

- A diversified bond portfolio, which can include US Treasury securities, corporate debt securities, and government bonds.

- Income-producing equities, such as dividend-paying stocks.

- Individual Retirement Accounts (IRAs), which include traditional IRAs, Roth IRAs, and spousal IRAs.

- Annuities, which can provide a guaranteed income stream.

- A total return investment approach, which involves investing in a diverse mix of stock and bond funds adjusted for risk tolerance.

Individual retirement accounts (IRAs)

There are several types of IRAs, including:

• Traditional IRA: This is a tax-advantaged plan that allows you to enjoy significant tax breaks while saving for retirement. Contributions may be tax-deductible, and you pay no taxes on earnings until retirement, when withdrawals are taxed as income.
• Roth IRA: This is a newer version of the traditional IRA, offering substantial tax benefits. Contributions are made with after-tax money, meaning taxes have already been paid on money going into the account. As a result, you won't have to pay tax on any contributions or earnings withdrawn from the account at retirement.
• Spousal IRA: IRAs are usually reserved for workers with earned income, but the spousal IRA allows the spouse of such a worker to also fund an IRA. The working spouse's taxable income must be more than the contributions made to any IRAs, and the spousal IRA can be either a traditional or Roth IRA.
• Rollover IRA: This type of IRA is created when you move a retirement account, such as a 401(k) or IRA, to a new IRA account. You can still take advantage of the tax benefits of an IRA, and there's no limit to the amount of money that can be transferred.
• SEP IRA: This is similar to a traditional IRA but is designed for small business owners and their employees. Only the employer can contribute, and contributions go into a SEP IRA for each employee rather than a trust fund. Self-employed individuals can also set up a SEP IRA.
• SIMPLE IRA: This type of IRA is available to small businesses that do not have any other retirement savings plan. It allows employer and employee contributions, similar to a 401(k) plan, but with simpler, less costly administration and lower contribution limits.

The best IRA accounts will offer the ability to invest in a wide range of financial products, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. There are also self-directed IRAs (SDIRAs) that permit investors to make all the investing decisions, offering access to a broader selection of investments, including real estate and commodities.

Annuities

There are two phases to annuities: the accumulation phase and the payout phase. During the accumulation phase, investors fund the annuity with either a lump-sum payment or periodic payments. The annuitant then begins receiving payments after the annuitization period for a fixed period or for the rest of their life.

Immediate annuities are often purchased by people who have received a large lump sum of money and want to exchange it for future cash flows. Deferred annuities, on the other hand, are designed to grow on a tax-deferred basis and provide guaranteed income at a specified future date.

Fixed annuities offer a guaranteed minimum interest rate and fixed periodic payments. Variable annuities, regulated by the SEC and state insurance commissioners, allow for larger or smaller future payments depending on the performance of the annuity fund's investments. Indexed annuities, regulated by state insurance commissioners, are fixed annuities that provide returns based on the performance of an equity index, such as the S&P 500.

High-yield savings accounts

• My Banking Direct: 5.45% APY
• UFB Direct: 5.25% APY
• Credit Karma Money Save: 5.10% APY
• Varo: 5.00% APY (on balances up to $5,000)
• LendingClub: 5.00% APY
• CIT Bank: 5.00% APY (on balances of $5,000 or more)

The APY on your account can and likely will fluctuate any time the Fed raises or decreases the federal funds rate. That’s the interest rate banks charge one another to borrow money, and your bank may be inclined to raise or lower rates on its financial products based on these changes.

When choosing a high-yield savings account, it's important to shop around for a lucrative APY, consider the requirements for opening an account, read the fine print on fees, and consider access limits on your funds.

Stocks and bonds

Stocks

Stocks are a type of security that represents ownership in a company. When you buy a stock, you become a shareholder in the company and are entitled to a share of its profits. Stocks are typically seen as a risky investment, as their value can fluctuate significantly, but they offer the potential for high returns.

Bonds

On the other hand, bonds are a type of fixed-income security, meaning they provide a steady stream of income in the form of interest payments. Bonds are issued by governments or corporations to raise funds, and they have a fixed maturity date. When the bond reaches maturity, the investor is repaid the principal amount they invested.

Stocks vs Bonds for Retirement

The traditional advice for retirees is to reduce risk by shifting their portfolio towards bonds. This is because preserving spending power is often more important than actively growing their portfolios. The "60/40 rule", for example, suggests that a retiree's portfolio should be made up of 60% stocks and 40% bonds.

However, John Rekenthaler, vice president of research at Morningstar, argues that equity-dominated portfolios are better options for retirees. By examining market data from the last 80 years, he found that portfolios heavily weighted in equities allowed retirees to safely withdraw more money each year and led to more capital appreciation.

Rekenthaler's research showed that despite the increased risk associated with stocks, portfolios with a higher allocation of equities would have given retirees more safe spending power during the 30-year periods examined. Additionally, retirees using a conservative allocation with mostly bonds would have run out of money during three different 30-year periods in the 20th century, according to the simulations.

While bonds are often seen as a safer option for retirees, stocks can provide higher returns and support higher withdrawal rates. As a result, retirees may want to consider allocating a larger portion of their portfolio to stocks than is traditionally recommended. However, it is important to keep in mind that past performance does not guarantee future results, and all investments carry some degree of risk. Consulting a financial advisor can help determine the best investment strategy for your individual needs and risk tolerance.

Mutual funds

There are several benefits to investing in mutual funds. Firstly, they are affordable and accessible, with most funds setting a low dollar amount for the initial investment and subsequent purchases. They also offer professional management, as fund managers research and monitor the performance of the securities. This can be particularly beneficial for those who don't have the time or expertise to manage their investments themselves. Mutual funds also provide diversification, as they typically invest in a range of companies and industries, helping to lower the risk of loss in case any one company fails.

Additionally, mutual funds offer liquidity, allowing investors to redeem their shares at any time for the current net asset value plus any redemption fees. This flexibility can be advantageous for those who may need to access their funds quickly.

When investing in mutual funds, it is essential to consider the fees and expenses associated with them, as these can significantly impact the overall returns. Mutual funds typically charge annual fees, expense ratios, or commissions, which can reduce the net returns for investors. It is also important to note that mutual funds do not guarantee returns, and there is always the possibility of depreciation in the value of the investment.

There are several types of mutual funds, including money market funds, bond funds, stock funds, and target-date funds, each with its own features, risks, and rewards. Money market funds, for example, have relatively low risks as they can only invest in certain high-quality, short-term investments. On the other hand, bond funds aim for higher returns but come with higher risks. Stock funds can be further categorized into growth funds, income funds, index funds, and sector funds, each with its own investment focus.

Overall, mutual funds can be a great option for those looking to access a diversified, professionally managed portfolio. By pooling money from multiple investors, mutual funds offer individuals the opportunity to invest in a wider range of securities than they might be able to on their own. However, it is important to carefully consider the fees, risks, and types of mutual funds before investing.

Frequently asked questions