Retirees: How To Navigate Today's Markets With Your Investments

As people are living longer, retirees need to make their retirement nest egg last as long as possible. While retirees should reduce the risk in their investment portfolios, investing money safely can help prolong their retirement funds.

There are several safe investment options for retirees, such as high-yield savings accounts, which can help older adults earn 4% yearly returns. Other options include low-risk, low-return investments, and diversifying one's portfolio with multiple safe investment options like bonds instead of relying on Social Security or retirement savings.

High-yield savings accounts

CIT Bank Platinum Savings

CIT Bank offers a high-yield savings account with a 5% APY on balances of $5,000 or more. If your balance falls below $5,000, the APY drops to 0.25%. There is no monthly maintenance fee and the minimum opening deposit is only $100.

BrioDirect High Yield Savings Account

BrioDirect's high-yield savings account offers a highly competitive rate of 5.3% APY on any balance over $25. There is no monthly maintenance fee, but there is a high minimum opening deposit of $5,000. This account is best for retirees who already have a few thousand dollars saved and don't plan on accessing their money often.

UFB Direct Secure Savings

UFB Direct offers a high-yield savings account with a competitive APY of 5.25%. There is no minimum opening deposit, no minimum balance requirement, and no monthly service fee. This account also offers ATM access and mobile check deposits, which not all online banks provide.

Bask Interest Savings Account

Bask Bank's high-yield savings account has a competitive APY of 5.1% and does not require a minimum opening deposit or balance. There is no monthly fee, but there is a $35 charge for outgoing wire transfers. This account is a good option for retirees who want to keep their funds at multiple institutions to find the best products.

LendingClub High-Yield Savings Account

LendingClub's high-yield savings account has a competitive APY of 5% and a low minimum opening deposit of $100. There is no monthly maintenance fee, and the account comes with a free ATM card. This account is a good choice for retirees who may need semi-regular access to their money.

Low-risk investments

• High-yield savings accounts: These accounts offer a modest return on your money, with the highest-yielding options available online. Your money is completely safe, and most accounts are government-insured for up to $250,000 per account type per bank.
• Money market funds: These are pools of CDs, short-term bonds, and other low-risk investments that provide diversification. They are typically liquid, allowing you to withdraw funds without penalties. Money market funds are considered safe investments, and their value per share usually remains above $1.
• Short-term certificates of deposit (CDs): CDs are loss-proof in FDIC-backed accounts, provided you don't withdraw the money early. With interest rates rising, short-term CDs are attractive, and you can reinvest when rates go up. Avoid locking into long-term CDs to prevent getting stuck with below-market rates.
• Series I savings bonds: These low-risk bonds adjust for inflation, protecting your investment. The interest rate on these bonds is currently high due to inflation and will continue to adjust semi-annually. Series I savings bonds are backed by the US government, making them a safe investment choice.
• Treasury bills, notes, bonds, and TIPS: These are highly liquid securities issued by the US Treasury. They can be bought and sold directly or through mutual funds. If held until maturity, you won't lose money unless you invest in a negative-yielding bond. Selling them early may result in losing some principal as their value fluctuates with interest rate changes.
• Dividend-paying stocks: While stocks are generally riskier than cash or government debt, dividend-paying stocks are considered safer than high-growth stocks. These stocks tend to be from stable and mature companies, offering regular dividend income and potential stock price appreciation. Dividend-paying stocks are less volatile and may not fall as much during market downturns.
• Money market accounts: Similar to savings accounts, money market accounts offer interest payments and debit card access. They may require higher minimum deposits than savings accounts but often provide higher interest rates. These accounts are FDIC-insured for up to $250,000 per depositor per bank, ensuring the safety of your principal.
• Annuities: Annuities provide a guaranteed income stream over a fixed period or for life. They can be structured in various ways, such as fixed annuities, which promise a specific monthly income. Annuities offer tax-deferred growth and the potential for additional benefits like death benefits or minimum guaranteed payouts. However, they are fairly illiquid, and it can be challenging to get out of them without penalties.

Stocks and bonds

Stocks

Although stocks are generally considered a risky investment better suited to younger investors, retirees can still benefit from the stock market as part of their investment strategy. However, it is important to adopt a more conservative approach as you get older. A common rule of thumb is that the percentage of stocks in your portfolio should equal 100 minus your age. So, if you're 65, around 35% of your money should be in the stock market, although this will vary depending on personal circumstances and risk tolerance.

When investing in stocks, retirees should give close consideration to defensive stocks, which offer exposure to companies providing essential services and products. These include:

• Utilities: Companies providing necessities such as water, electricity, and heating.
• Telecommunications: Phone and internet services, which are no longer considered luxuries in today's economy.
• Consumer staples: Household basics that consumers purchase regularly, such as toothpaste, toilet paper, and soap.
• Healthcare: Even during a recession, consumers still spend on medicines, regular check-ups, and urgent surgeries.

Additionally, retirees may want to consider dividend stocks, which represent a percentage of profits paid out to shareholders. Dividend Kings and Dividend Aristocrats, part of the S&P 500, have raised their dividends consistently for 50 and 25 years or more, respectively. Mutual funds focusing on dividend stocks are also a good option, as they are managed by top investment professionals and allow for diversification.

Bonds

While bonds may not offer high returns, they provide stability and the potential for some growth. Revenue and general obligation municipal bonds are a good option for retirees as they offer tax-free interest and can help prevent investors from being pushed into the next highest tax bracket, which can happen with pensions and required minimum distributions from IRAs and 401(k)s.

Mutual funds focused on municipal bonds are also attractive to retirees. These allow investment in a variety of bonds with staggered maturity dates, providing consistent income.

When choosing which bonds to invest in, retirees should focus on high-quality bonds. This means generally avoiding junk bonds, which are issued by companies or governments at higher risk of defaulting on their debt during a recession or stock market tumble, and instead choosing investment-grade bonds.

One approach to bond investing is to allocate a third of the bond portfolio to each of the following categories: U.S. Treasury bonds, corporate bonds, and mortgage-backed securities. Allocating to municipal bonds can also make sense, especially for high-income retirees, due to their tax advantages.

For retirees who want a simpler approach, a mutual fund or exchange-traded fund that tracks a broad, diversified bond benchmark can be a good option. The Vanguard Total Bond Market Index Fund (VBTLX or BND) and iShares Core U.S. Aggregate Bond ETF (AGG) are commonly used.

Additionally, retirees may want to consider creating a bond ladder, which involves buying a series of bonds with staggered maturity dates, resulting in small infusions of cash over consecutive years rather than a large lump sum payout.

Retirees can benefit from a well-balanced portfolio that includes both stocks and bonds. The "bucket strategy" involves structuring retirement assets into three buckets based on longevity and when cash is needed:

• The first bucket holds cash, cash equivalents, and other liquid assets designed to be used in the first years of retirement.
• The second, medium-term bucket is focused mainly on bonds.
• The third, long-term bucket consists of stocks designed to promote growth.

As the cash bucket becomes depleted, medium-term assets are sold to refill it, and long-term assets are liquidated to top off the medium-term bucket. This approach helps retirees source their needed cash flows regardless of what's happening with their long-term holdings.

When creating a portfolio, retirees should consider their risk tolerance and how long they expect their retirement to last. An aggressive portfolio, designed for a retirement lasting more than 25 years, may include 8% cash, 32% bonds, and 60% stocks. On the other hand, a conservative portfolio, designed for a retirement lasting fewer than 20 years, might include 40% cash, 48% bonds, and 12% stocks.

It is important to note that the specific percentages and investments within a portfolio may vary depending on individual circumstances and should be carefully considered with the help of a financial advisor.

Real estate rentals

Firstly, you will need to have the cash available to buy the property. If you pay the right price, you can charge rent that covers the mortgage, taxes, and other fees, with some extra money left over. However, it's important to remember that being a landlord is a time-consuming job, so you should only consider this investment if you are willing to put in the effort. If not, you may need to hire someone to manage the property for you, which will cut into your profits.

There are several benefits to investing in real estate rentals for retirement:

• Steady cash flow: Rental properties can provide a consistent income stream throughout retirement, unlike stocks or bonds, which have fluctuating dividends and values.
• Appreciation potential: Real estate investments typically appreciate over time, allowing investors to build equity and increase their net worth.
• Tax advantages: Real estate investors can claim various tax deductions, such as repairs, maintenance, mortgage interest, property taxes, and depreciation, to reduce their taxable income.
• Inflation hedge: Rental incomes tend to rise with inflation rates, helping to protect investors from the eroding effects of inflation on their retirement income.
• Tangible assets: Unlike stocks or bonds, real estate is a physical asset that investors can see and touch, providing a sense of security and control.

However, there are also some challenges and risks associated with investing in real estate rentals:

• Upfront cost: Purchasing a rental property typically requires a substantial down payment, which can be challenging for retirees who may have limited funds.
• Management responsibilities: Being a landlord comes with ongoing responsibilities, such as maintenance, repairs, and dealing with tenants. If you are unable or unwilling to take on these tasks, you will need to hire a property management company, which will reduce your profits.
• Vacancy and tenant-related issues: There is a risk of vacancies, as well as dealing with tenants who fail to pay rent or cause excessive maintenance costs.
• Market fluctuations: Real estate values can fluctuate, and there is always the risk of a market crash, as seen in 2009.
• Illiquidity: Real estate investments are relatively illiquid, meaning it may be difficult to sell the property quickly if you need urgent cash.

Mutual funds

Types of Mutual Funds

• Balanced Funds: These funds invest in both stocks and bonds, aiming to balance growth and stability. They usually have a target allocation, such as 60% stocks and 40% bonds.
• Bond Funds: These funds focus solely on investing in fixed-income assets like government, corporate, or municipal bonds. They provide stable income through periodic interest payments.
• Dividend Funds: These funds invest in the stocks of companies that pay dividends regularly. They aim to generate income from dividend payments while also benefiting from capital appreciation.

Advantages of Mutual Funds for Retirees

• Diversification: Mutual funds invest in a diversified portfolio of assets, reducing the risk associated with individual stock or bond performance.
• Professional Management: Mutual funds are managed by top investment professionals who make informed decisions on behalf of the investors.
• Risk Mitigation: By investing in multiple stocks or bonds, mutual funds diffuse risk. If one company underperforms, it has less impact on the overall fund.
• Income Generation: Mutual funds can provide a steady income stream through dividend or interest payments.
• Convenience: Mutual funds allow retirees to invest in a variety of stocks or bonds without having to research and manage each investment individually.

Factors to Consider When Choosing Mutual Funds

When selecting mutual funds, retirees should consider the following factors:

• Risk Tolerance: Evaluate your risk tolerance and choose funds that align with your comfort level. Bond funds are generally more conservative, while balanced and dividend funds may be more aggressive due to their stock holdings.
• Performance and Historical Returns: Assess the fund's historical performance over different time periods to gauge its consistency and returns.
• Fees and Expenses: Consider the expense ratios and other fees associated with the fund. Lower fees can positively impact your overall returns.
• Income Needs: Understand your income requirements during retirement and choose funds that can help meet those needs, whether through dividend payments or capital appreciation.
• Fund Reputation and Management: Look into the reputation and track record of the fund managers. Choose funds with a history of sound financial decisions and successful fund management.

Examples of Mutual Funds for Retirees

• American Funds Tax-Aware Conservative Growth and Income Portfolio (TAIFX): This fund offers a mix of U.S. and international stocks, as well as U.S. fixed-income assets. It has a Morningstar gold star rating and has outperformed its category average over the past one, three, five, and ten years.
• Vanguard Wellington Fund (VWELX): As the oldest balanced mutual fund, VWELX allocates up to 70% of its portfolio to stocks and the remainder to bonds. It focuses on high-quality, large-cap companies with a history of dividend growth.
• Schwab Balanced Fund (SWOBX): This fund offers exposure to U.S. and international stocks, as well as fixed-income assets. It provides more exposure to small-cap and growth stocks, offering a better potential for capital gains.
• T. Rowe Price Dividend Growth Fund (PRDGX): This actively managed fund takes a conservative approach to dividend investing, earning a Morningstar gold star rating. It seeks out dividend stocks with strong performance and low price volatility.
• Vanguard Long-Term Tax-Exempt Fund (VWLTX): This fund invests in municipal bonds with maturities between 10 and 25 years, providing tax-exempt income for wealthy investors with a long time horizon.

Remember, it is essential to consult with a financial advisor to determine the most suitable mutual funds for your specific needs and risk tolerance.

Frequently asked questions