Retirement Planning: Where To Invest Your Money

People who are approaching retirement age should consider putting their money in low-risk investments such as high-yield savings accounts, short-term bonds, and Treasury Inflation-Protected Securities (TIPS).

High-yield savings accounts offer higher interest rates than traditional savings accounts, and your money is FDIC-insured for up to $250,000 per account type per bank. Short-term bonds are a good option because they are less influenced by future market volatility. TIPS are government bonds that mirror the rise and fall of inflation, providing a safe investment that also helps to diversify your future retirement income.

It is also recommended that soon-to-be retirees work with a financial advisor to review their individual savings and investment plans to ensure they are on track to meet their goals.

High-yield savings accounts

One of the benefits of high-yield savings accounts is that they are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for credit unions. This means that your money is protected up to a certain amount if the bank fails. Additionally, high-yield savings accounts usually have no monthly fees and no minimum deposit requirements, making them accessible to retirees with varying financial situations.

When choosing a high-yield savings account, it is important to consider the interest rate, monthly fees, minimum deposit requirements, and account access. It is also worth noting that some high-yield savings accounts have limits on the number of monthly withdrawals, so it is important to review the terms and conditions before opening an account.

Overall, high-yield savings accounts are a great option for retirees who want to keep their money safe and accessible while earning a higher interest rate on their deposits. By doing some research and comparing different accounts, retirees can find the best high-yield savings account for their needs.

Short-term bonds

Short-term bond funds, which are mutual funds or exchange-traded funds (ETFs) that invest in short-term bonds, can be a good option for those saving for short-term goals. These funds offer exposure to bonds with maturities of around one to five years, allowing investors to earn a decent rate of return without taking on too much risk. When choosing a short-term bond fund, pay attention to the expense ratio or fee, as a lower expense ratio will benefit you as an investor.

Some examples of short-term bond funds include:

• SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
• Schwab 1-5 Year Corporate Bond ETF (SCHJ)
• Vanguard Short-Term Bond ETF (BSV)
• Fidelity Short-Term Bond Fund (FSHBX)

TIPS bonds

TIPS (Treasury Inflation-Protected Securities) are an excellent investment vehicle for retirees. They are U.S. government securities designed to protect investors from inflation. TIPS pay a fixed coupon rate of interest that is lower than that of regular Treasury bonds. However, the face value of TIPS is adjusted to match changes in the consumer price index. This means that as inflation rises, so do the interest payments and the face value of your TIPS, providing a hedge against inflation. This is particularly beneficial for retirees who are worried about outliving their savings.

TIPS can be purchased directly from the U.S. Treasury through TreasuryDirect. The annual purchase limit is $10,000 per Social Security number, and they can be bought electronically by creating an account on the TreasuryDirect website. Since 2010, the IRS has also allowed filers to use their federal income tax refunds to purchase up to $5,000 in paper TIPS.

When considering investing in TIPS, it is important to keep in mind that they have a maturity period of 30 years, but they can be redeemed after holding them for at least one year. Additionally, if you redeem TIPS before five years, you will forfeit the last three months' worth of interest.

TIPS are an attractive option for retirees due to their inflation protection features. The fixed rate and inflation rate of TIPS change periodically, so it is essential to stay informed about the market to make informed investment decisions. While TIPS offer safety and inflation protection, they may not always provide the highest returns. Therefore, it is recommended to diversify your investment portfolio with other types of assets to balance risk and return.

One strategy that can be employed with TIPS is the bond ladder strategy, which involves purchasing bonds with staggered maturity dates to generate a continuous stream of income. This strategy is particularly useful for retirees as it provides access to cash when the bonds mature and helps protect the purchasing power of your money over time.

Mutual funds

Some examples of mutual funds for retirement include:

• T. Rowe Price Retirement Income 2020 (TRLAX)
• Vanguard Wellington Fund (VWELX)
• Dodge and Cox Income Fund (DODIX)
• PGIM High Yield Fund (PHYZX)
• T. Rowe Price Dividend Growth Fund (PRDGX)
• Schwab International Index Fund (SWISX)
• Vanguard Long-Term Tax-Exempt Fund (VWLTX)
• BBH Limited Duration Fund (BBBMX)

Real estate

There are a few ways to invest in real estate, such as flipping properties or looking for income-producing properties. Flipping properties involves finding a piece of land or a house that can be remodelled and sold quickly in a rising market. On the other hand, income-producing properties are commercial office spaces, apartments, duplexes, or residential homes that can be rented out.

When investing in real estate, it is crucial to assess your skills and available capital to determine the best approach for your first investments. For example, those with connections to their city's development plans may have a better idea of attractive pieces of land, while those with contractor contacts may be able to secure remodelling deals at a discount.

• Record-keeping and taxes: There are record-keeping and tax requirements when investing in real estate. The rental real estate tax deduction can be beneficial, but depreciation will be recaptured later, so it is not entirely tax-free.
• Leverage: Borrowing to buy, also known as leverage, can be a strategic way to build a real estate portfolio if done carefully. However, too much leverage can be dangerous, as seen during the 2009-2011 economic slowdown when many investors lost their properties due to high leverage.
• Location: Choosing the right location is crucial when investing in real estate. "Location, location, location" is a well-known saying in the industry, and for a good reason. It is essential to have an intuition about which areas of town might become popular and which ones to avoid.
• Intuition vs. enthusiasm: It is important to distinguish between intuition and enthusiasm when investing in real estate. During the real estate boom of 2004-2006, many people jumped in without proper intuition and skill, and ended up losing their investments.
• Deep pockets: Real estate investing often requires deep pockets, as there will be property taxes, potential vacancies, repairs, and maintenance costs to consider.
• Patience and systematic work: Building a steady source of retirement income through real estate takes patience and a systematic approach. It is crucial to work on building a portfolio of income-producing properties over time.

In summary, real estate can be a lucrative and stable investment for retirement, but it requires careful planning, knowledge, and a long-term view. It is essential to assess your skills, capital, and risk tolerance before diving into this complex but potentially rewarding investment strategy.

Frequently asked questions