Retirement Investments: Best Places For Your Savings

Investing for retirement is important, but the strategy may need to change as you age. A 70-year-old retiree will have different financial goals and needs compared to someone in their 30s or 50s. Generally, older investors tend to focus on low-risk investments that provide a stable income, rather than high-risk, high-reward opportunities. Here are some options for where a 70-year-old retiree could consider investing their savings.

High-yield savings accounts

Benefits of High-Yield Savings Accounts

• Higher Interest Rates: The primary advantage of high-yield savings accounts is the potential to earn much higher interest rates compared to traditional savings accounts. This means your savings will grow faster over time, even without any additional effort on your part.
• Federal Insurance: High-yield savings accounts at banks and credit unions are typically insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), up to a limit of $250,000 per depositor. This means your savings are protected, even if the financial institution fails.
• Easy Access: High-yield savings accounts provide easy access to your funds, usually through online banking, mobile apps, or ATMs. This makes them a good option for emergency funds or short-term savings goals.
• Low Fees: Many high-yield savings accounts have low or no monthly service fees, minimum balance requirements, or other charges. This makes them a cost-effective option for retirees looking to maximize their savings.

Choosing a High-Yield Savings Account

When selecting a high-yield savings account, consider the following factors:

• Interest Rates: Look for accounts with competitive interest rates, ideally those that are higher than the national average. Keep in mind that rates can vary over time, so choose an account with a history of offering attractive rates.
• Fees and Charges: Avoid accounts with high monthly service fees, maintenance fees, or transaction fees. Some accounts may also have minimum balance requirements to waive fees, so be sure to read the fine print.
• Digital Features: Consider the digital experience offered by the financial institution, including mobile apps, online banking platforms, and any built-in budgeting or savings tools. These features can make managing your savings easier and more convenient.
• Customer Service: Research the bank's customer service options, such as live chat, phone support, or in-person branches. Choose a bank with a good reputation for customer satisfaction and responsiveness.
• Minimum Requirements: Some high-yield savings accounts have minimum deposit or balance requirements to open or maintain the account. Ensure these requirements align with your savings plans and financial situation.

Examples of High-Yield Savings Accounts

• LendingClub LevelUp Savings: Offers a special higher yield when you deposit at least $250 monthly. No minimum opening deposit or monthly service fees.
• EverBank Performance Savings: Earns more than the national average APY. No minimum deposit or balance requirements, and no monthly maintenance fee.
• BrioDirect High-Yield Savings: Offers a competitive yield but requires a $5,000 minimum opening deposit.
• Bask Bank Interest Savings: No minimum opening deposit or balance requirements. Consistently offers a top-tier APY.
• CIT Bank Platinum Savings: Offers a high APY on balances of $5,000 or more. Requires a $100 minimum opening deposit but no monthly fee.
• American Express High Yield Savings: Competitive yield, no monthly fee, and no minimum balance requirement. Well-known credit card company with a strong reputation.
• Capital One 360 Performance Savings: Earns the same rate on all balances. No minimum deposit or balance requirements, and no monthly fees. Capital One also offers a checking account that earns interest.

Certificates of deposit

CDs are one of the safest ways to invest your money. Firstly, their rate is fixed and guaranteed. Secondly, 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 a safer and more conservative investment than stocks and bonds, but they offer a lower opportunity for growth. They are ideal for those who want to earn more than most savings, checking, or money market accounts without taking on more risk.

CDs come in a variety of terms, from 3-, 6-, or 12-month commitments to 4-, 5-, and even 10-year terms. The top CD rates can be three to four times higher than the national average rate. Generally, the longer the term, the higher the rate.

CDs are available at banks, credit unions, and brokerages. Most banks and credit unions offer at least one CD, and you can also open them through your brokerage account.

When opening a CD, you'll need to consider the interest rate, term, principal, and financial institution. The interest rate is usually fixed, but 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 you agree to deposit when you open the CD, and the financial institution sets factors such as early withdrawal penalties (EWPs) and whether your CD will default to being automatically reinvested at maturity.

CDs are 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. They are also a good option if you want to invest some of your savings conservatively, achieving lower risk and volatility than investing in the stock and bond markets.

One downside of CDs is that your money is locked into the investment. However, this can be beneficial for savers who worry about withdrawing from their savings. The fixed term of a CD and the penalty for early withdrawal can deter spending.

A liquid CD, or no-penalty CD, combines the benefits of a traditional CD with the flexibility of a savings account. These allow you to access your funds without incurring fees, but they generally offer lower interest rates when compared with traditional CDs.

Dividend-paying stocks

When choosing dividend-paying stocks, it is important to select companies with ample free cash flow that can afford to make their dividend payments. Companies with high free cash flow margins tend to have good upside potential. It is also advisable to choose companies with a history of consistent dividend payments and to diversify across different business sectors.

However, it is important to remember that dividends are not guaranteed, and companies can choose not to declare them. Dividends are also taxed at the income tax rate, which is higher than the capital gains rate. Therefore, it is crucial to consider the potential drawbacks and consult a financial advisor before making any investment decisions.

Real estate investment trusts

• Steady dividends: REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. This makes them an attractive option for retirees seeking a consistent stream of income.
• High returns: Historically, REITs have offered higher returns compared to some other types of investments, such as stocks or fixed-income assets.
• Liquidity: Publicly traded REITs are easily accessible and can be bought and sold with the click of a button, providing more liquidity compared to owning physical real estate.
• Lower volatility: Due to their larger dividends, REITs tend to be less volatile than traditional stocks, making them a good hedge against market ups and downs.
• Diversification: Investing in REITs allows you to diversify your portfolio by adding exposure to the real estate sector.

However, there are also some potential drawbacks to consider:

• Tax liabilities: REIT dividends are typically taxed as ordinary income, which can result in higher tax rates compared to qualified dividends.
• Sensitivity to interest rates: REIT prices tend to be sensitive to changes in interest rates, and they may decline when rates rise.
• Property-specific risks: Different types of REITs, such as those focused on hospitality or retail, may perform poorly during economic downturns or industry headwinds.
• Debt risks: REITs often carry a significant amount of debt, which can impact their financial stability.

When investing in REITs, you have several options:

• Publicly traded REITs: These are traded on major stock exchanges and can be purchased through a brokerage account, similar to buying stocks. They offer greater transparency and liquidity.
• Public non-traded REITs: These are not traded on exchanges but can be purchased through financial advisors or online real estate crowdfunding platforms. They tend to have higher account minimums and may be less liquid.
• Private REITs: Private REITs are not available to the general public and are typically only accessible to high-net-worth individuals. They have fewer disclosure requirements and may be more challenging to value.

Overall, REITs can be a valuable addition to a retiree's investment portfolio, offering the potential for consistent income, diversification, and long-term capital appreciation. However, as with any investment, it's important to carefully consider the risks and potential drawbacks before making any decisions.

Bonds

However, it is easy for retirees to take on too much risk when investing in bonds, and they should generally avoid junk bonds in favour of investment-grade bonds issued by entities of high credit quality.

There are several types of bonds that retirees might consider:

• Treasury bonds are government debt securities issued by the US Federal government and sold by the US Treasury Department. They pay a fixed rate of interest every six months, with a maturity date of 20-30 years. Treasury bonds are considered risk-free and are guaranteed by the US government if held to maturity. They can be a good investment for those looking for safety and a fixed rate of interest. However, they typically offer a lower interest rate than corporate bonds.
• Corporate bonds are debt securities issued by corporations. They also pay interest, which can be based on a fixed or variable rate. Corporate bonds tend to pay a higher yield than Treasury bonds since they have default risk. When buying corporate bonds, there is no guarantee that the initial investment will be repaid, and these bonds should be researched carefully.
• Municipal bonds are debt issued by state or local governments to fund public projects and infrastructure. They offer stable, tax-free income, lower risk, and a predictable return. Many municipal bonds are exempt from federal, state, and local income tax.
• Mortgage-backed securities are another option for diversifying a bond portfolio.

When investing in bonds, retirees should also consider the duration, or the average time it takes for the bond to mature. Given the recent high inflation, short-term (zero to three years) or intermediate-term (about three to seven years) bonds are likely to make the most sense.

One approach to bond investing is to allocate a third of the bond portfolio to each of the three categories: US Treasury bonds, corporate bonds, and mortgage-backed securities. Allocating to municipal bonds may also make sense, especially for high-income retirees.

Retirees can also invest in bond funds, which are mutual funds or exchange-traded funds that track a broad, diversified bond benchmark. These funds are a one-stop shop that diversifies across both stocks and bonds according to a pre-set allocation. Target-date funds are similar, changing their asset allocation over time to become more conservative.

Frequently asked questions