Retirement Reinvention: Shifting Investments For A Secure Future

As you approach retirement, it's important to have a clear plan for your investments. The closer you get to retirement, the less risk you should take. Here are some options for where to move your investments:

- High-yield savings accounts: It's a good idea to have three to six months' worth of expenses in accessible reserves, split between your checking and savings. The Marcus by Goldman Sachs High Yield Online Savings and the American Express® High Yield Savings Account are two examples of accounts with higher-than-average interest rates and no fees.

- Short-term bonds: These are a good option for low-risk investments because they aren't as influenced by future market volatility.

- Treasury Inflation-Protected Securities (TIPS): TIPS are government bonds that mirror the rise and fall of inflation, helping to protect your investments from rising inflation.

- Diversification: Diversifying your investments can decrease overall investment risk while increasing the potential for overall return. This can be achieved through mutual funds, index funds, and ETFs, which pool investor money into a collection of securities.

- Retirement accounts: Retirement accounts can be a more aggressive part of your investment portfolio since they usually have a longer time horizon. They are also a good place to trade more frequently, as there are no capital gains tax consequences.

High-yield savings accounts

How They Work

Pros and Cons

One of the main advantages of high-yield savings accounts is the significantly higher interest rates compared to traditional savings accounts. This means your savings will grow at a faster rate. Additionally, these accounts provide greater security than some other investment options, especially if you're risk-averse.

However, one disadvantage is that you may not earn as much as you would by investing in the stock market or other securities. Additionally, high-yield savings accounts are sensitive to changes in the economy, and your APY can increase or decrease at the bank's discretion. There may also be restrictions on the number of monthly withdrawals you can make.

When to Choose a High-Yield Savings Account

Choosing the Right Account

When selecting a high-yield savings account, it's essential to shop around for the best interest rates and consider the requirements for opening an account. Look for accounts with competitive APYs, ideally at least ten times the national average. Additionally, consider any minimum deposit requirements, account fees, access limits, and the usability of their online and mobile platforms. It's also important to weigh the available customer service options to ensure they align with your communication preferences.

Short-term bonds

Bonds with shorter times to maturity are less sensitive to changes in interest rates than longer-term bonds, meaning investors won’t suffer as much if rates head higher. Interest rates and bond prices have an inverse relationship, so when rates rise, bond prices fall, and vice versa.

Some of the top 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)

When investing in short-term bonds, pay special attention to the fund’s expense ratio or fee. Generally, the lower the expense ratio, the better the return for the investor.

Treasury Inflation-Protected Securities (TIPS)

TIPS are considered a low-risk investment because the U.S. government backs them. They are often compared with Series I bonds because they both offer inflation protection. However, TIPS can be resold on the secondary market, purchased in different maturities, and bought in unlimited quantities, whereas I-bonds can only be purchased on the Treasury's website and have restrictions on the amount that can be purchased annually.

TIPS can be purchased directly from the U.S. government through the TreasuryDirect system, in $100 increments with a minimum investment of $100, and are available in 5-, 10-, and 30-year maturities. They can also be bought through a TIPS mutual fund or exchange-traded fund (ETF), although purchasing TIPS directly allows investors to avoid the management fees associated with mutual funds.

TIPS are designed to protect investors from rising living costs over the long term. They are considered a good investment for retirees or those seeking to generate a stable income stream, as they provide semi-annual interest payments that are adjusted for inflation. TIPS also offer tax advantages, as they are exempt from state and local taxes.

However, it is important to note that TIPS typically offer lower yields compared to other types of bonds due to their lower risk. Additionally, the inflation adjustments to the principal of TIPS are taxable as income in the year they occur, even though investors do not receive this amount until the security matures or is sold.

Stocks and bonds

Stocks

Stocks are shares in a publicly listed company. Stock prices tend to rise over the long term, which is why people buy them. Since 1926, the S&P 500 has posted an average annual return of 10.24% with dividends reinvested. This means that if you invest in stocks in your 30s and retire in your 70s, there's a high likelihood that your money will have grown over those 40 years.

However, stocks can fall. In 2008 and 2020, stock prices dropped by more than 35%. Therefore, while stocks can be a good investment, they do carry a certain amount of risk.

Bonds

Bonds are debt securities issued by corporations and governments to raise funds. Investors purchase bonds by putting up an upfront amount as an initial investment, called the principal. When the bond expires or matures, investors are paid back their principal. In return, investors usually receive a fixed, periodic interest payment from the entity that issued the bond.

Bonds are a good investment for those looking for a steady rate of interest payments. They are also less risky than stocks, as they fluctuate less in price.

Stocks vs Bonds

Both stocks and bonds have their advantages and disadvantages. Stocks offer higher returns over time but carry more risk. Bonds are less risky and provide a steady income, but the returns may not keep up with inflation.

When it comes to retirement, the general advice is to have a larger percentage of your portfolio in stocks when you are younger, and shift towards bonds as you get older. This is because younger investors can afford to take more risk, and they have a longer time horizon for their investments to grow. As people approach retirement age, their risk tolerance decreases, and they may not be able to afford any wild swings in the stock market. Therefore, it is common for retirees to have a more conservative allocation of 50% in stocks and 50% in bonds.

However, it is important to consider your individual circumstances when deciding how to allocate your portfolio. Factors such as your risk tolerance, time horizon, and financial goals will all play a role in determining the right mix of stocks and bonds for you.

Mutual funds, index funds and ETFs

Mutual funds, index funds, and ETFs are all investment vehicles that can help you save for retirement. Here is some information about each of them:

Mutual Funds

Mutual funds are investment funds that pool money from multiple investors to purchase a diversified portfolio of assets. They are typically actively managed by professional fund managers who aim to beat the market by buying and selling stocks based on their expertise. Mutual funds can invest in various assets, including stocks, bonds, and other securities. They offer investors a simple way to gain exposure to a diversified portfolio without having to build and manage it themselves. The fees for mutual funds tend to be higher than those for index funds or ETFs due to the active management involved. Additionally, mutual funds are usually priced and traded at the end of each trading day, and they may have higher minimum investment requirements compared to ETFs.

Index Funds

Index funds are a type of investment fund that aims to track the performance of a specific market index, such as the S&P 500 or the Nasdaq 100. They are passively managed, meaning they aim to replicate the returns of the underlying index without actively trying to beat the market. Index funds are often based on a preset basket of stocks or other securities that make up the index they are tracking. By investing in an index fund, you gain exposure to a diversified portfolio of assets that mirrors the index's performance. Index funds are known for their low costs, broad diversification, and lower risk compared to individual stocks. They are also tax-efficient, especially when held within a taxable account, as they tend to generate fewer capital gains taxes.

ETFs (Exchange-Traded Funds)

ETFs are similar to mutual funds in that they pool money from multiple investors to purchase a diversified portfolio of assets. However, ETFs are typically passively managed and designed to track a specific index or sector. ETFs are traded on stock exchanges, so their prices fluctuate throughout the trading day, and they can be bought and sold at any time. They often have lower expense ratios than mutual funds, making them a more cost-effective option for investors. ETFs also offer more flexibility in terms of the minimum investment amount, as they can be purchased by the share. Additionally, ETFs are generally more tax-efficient than mutual funds, as capital gains taxes are only incurred when the shares are sold for a profit.

Frequently asked questions