Securing Your Future: Navigating Safe Retirement Investment Options

When it comes to investing for retirement, there are a variety of options to choose from, each with its own advantages and disadvantages. Here are some of the most common and safe investment strategies for retirement:

- Tax-Advantaged Retirement Accounts: These include employer-offered plans such as 401(k) and 403(b), as well as individual retirement accounts (IRAs). These accounts offer tax benefits, such as tax-deferred or tax-free growth, making them ideal for long-term savings.

- Asset Allocation: This strategy involves diversifying your investments across different asset classes, such as stocks, bonds, and cash. The allocation depends on your age and risk tolerance, with younger investors typically allocating more towards stocks and older investors favouring bonds and cash.

- Dividend-Paying Stocks: Investing in stocks that pay dividends can provide a steady income stream. While there are risks associated with the stock market, dividend-paying companies tend to be more established and stable, offering consistent dividend payments.

- Real Estate: Investing in rental properties or real estate investment trusts (REITs) can provide consistent income. However, it's important to consider the expenses and management requirements associated with rental properties.

- Annuities: Annuities are insurance contracts that provide consistent, long-term income payments. They are often advertised as a safe option for retirement, but it's crucial to understand the different types of annuities and their associated costs and risks.

- High-Yield Savings Accounts: While not technically an investment, high-yield savings accounts can provide a modest and safe return on your money, especially with the current high-interest rates.

- Certificates of Deposit (CDs): CDs offer a fixed rate of return and are backed by the FDIC, making them a secure investment option. However, there may be penalties for early withdrawal.

- Government Bonds: Treasury bills, notes, bonds, and TIPS offer low-risk investment options backed by the government. Their values fluctuate with interest rate changes, so it's important to consider the maturity dates when investing.

Tax-advantaged retirement accounts

Conventional vs Roth accounts

There are two types of accounts: conventional and Roth. Conventional accounts let you contribute tax-free and pay tax when you use the money. In contrast, Roth accounts let you pay tax when you contribute and withdraw tax-free. It is recommended to use a Roth account when you are starting your career and are in a lower tax bracket. You can then switch to a conventional account when you are earning more.

Types of Tax-Advantaged Retirement Accounts

• K) plans
• K) plans are usually offered through an employer. The employer selects the plan provider and sets the plan terms. Many employers match a portion of your contribution, which can be a significant benefit. The contribution limit for 2017 is $18,000. Workers 50 and older can contribute an additional $6,000.

Individual Retirement Accounts (IRAs)

IRAs are set up by the individual holding the account. You select the provider, which gives you more options. A traditional IRA is like a 401(k), but it is not tied to an employer and has lower contribution limits.

Self-Directed IRA

The self-directed IRA is useful for people who want to use their IRA money for investments other than stocks, bonds and mutual funds. Common self-directed IRA investing options include real estate, precious metals, private lending, limited liability companies and private equity investments.

Roth IRA

Roth IRAs are easy to open and available to anyone earning less than the established income limits. Contributions to a Roth IRA are funded with after-tax money instead of pre-tax money like a 401(k) or traditional IRA. Earnings grow tax-free and you can withdraw the original contributions at any time tax-free and penalty-free. At age 59 1/2, withdrawals can be made completely tax-free and penalty-free.

Simplified Employee Pension (SEP-IRA)

A Simplified Employee Pension plan (SEP-IRA) is commonly used by self-employed, single-person businesses. SEP-IRAs allow employers to contribute to a traditional IRA. For 2023, the maximum contribution is 25% of each employee's pay, contributed by the employer, up to a limit of $66,000.

Savings Incentives Match Plan for Employees (SIMPLE)

A Savings Incentives Match Plan for Employees (SIMPLE) can be implemented by employers with no more than a hundred employees. This can be a convenient retirement plan for smaller companies. However, a SIMPLE IRA's employee contribution limit is lower than that of a 401(k).

Solo 401(k)

The solo 401(k) is ideal for self-employed workers who earn a high income and want to maximise tax-advantaged savings. Like a regular 401(k), the account allows deferral of up to $18,000 pre-tax (those 50 years and older can defer an additional $6,000). The account also permits pretax profit-sharing contributions from their business entity, up to 25% of compensation. Combined total contributions must not exceed $54,000 (or $60,000 for individuals over 50).

Safe Harbor 401(k)

A safe harbor 401(k) allows for larger contributions from Highly Compensated Employees (HCEs). There are three options for a Safe Harbor 401(k):

• Non-Elective Safe Harbor – Eligible employees get an annual employer contribution of 3% of their salary.
• Basic Safe Harbor Match – The employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%.
• Enhanced Safe Harbor Match – The employer matches 100% of the first 4% - 6% of each employee’s contribution.

Dividend-paying stocks

When choosing dividend-paying stocks for your retirement portfolio, look for companies with attractive dividends that can be sustained. This means selecting companies that can afford to make their dividend payments from their free cash flow (FCF). FCF is the cash generated by a company after subtracting operating expenses and the cost of capital investments. It is important to note that not all companies pay dividends, and dividends can be stopped if a company gets into financial trouble.

• Visa (V): Visa is a data network company that sells its payment processing network to debt, credit card, and other payments companies. It has high free cash flow margins, allowing it to easily cover its dividend payments.
• Microsoft (MSFT): Microsoft is a well-known global company with a large market share in personal computer software. It has consistently high free cash flow margins, typically around 30% of sales, allowing it to cover its dividend payments and share buybacks.
• Lockheed Martin (LMT): Lockheed Martin is an aeronautics, defence, and space technology company with strong and consistent free cash flow. It has a history of raising its dividend annually for the past 21 years.
• Chevron (CVX): Chevron is a large oil and gas company that generates significant free cash flow. It has a strong track record of dividend payments and has hiked its payout annually for 37 consecutive years.
• Domino's Pizza (DPZ): Domino's Pizza is the largest pizza company in the world, generating consistent and significant free cash flow. It has been increasing its dividend payments and has the potential for stock price growth.
• Johnson & Johnson (JNJ): Johnson & Johnson is a diversified healthcare company with a strong track record of dividend payments. It operates in recession-resistant industries and benefits from the aging demographic trend.
• Coca-Cola: Coca-Cola is a well-known beverage company with a strong brand and a long history of paying dividends. It has been paying dividends since 1920 and has increased its dividend annually since 1963.

It is important to note that investing in dividend-paying stocks comes with market risk, as stock prices can fluctuate. Therefore, it is crucial to conduct thorough research and consider diversifying your portfolio to mitigate potential losses.

Rental property

Rental properties can be a good source of retirement income. Real estate is an inefficient market, and it is possible to find bargains with high returns on investment. A rental property can produce significantly more income than traditional passive investments if you purchase the right property at the right price and on the right terms.

However, it is important to note that rental property is not entirely a passive investment. It requires managing tenants, dealing with maintenance issues, and covering recurring expenses such as property taxes, insurance, and repairs.

Mortgage and Financing:

If you plan to finance the purchase with a mortgage, it is generally easier to do so before you retire. Mortgage lending guidelines typically require steady employment and a substantial down payment if you are not occupying the property. Consider using your IRA funds if you don't have enough cash for the down payment, as this can provide tax benefits.

Location and Demand:

Choosing a good location is crucial. Look for areas with strong rental demand, such as near downtown or a college campus. Ensure the property reflects the current demographic of the neighborhood.

Income and Expenses:

Calculate the expected income and expenses to ensure the investment is profitable. Include rental income, mortgage, interest, taxes, maintenance, vacancy rates, and other relevant factors. A rule of thumb is to aim for an annual return of about 8% on your investment after costs.

Tenant Screening and Management:

Thorough tenant screening is essential to minimize the risk of problems such as non-payment of rent. Consider using tenant screening services offered by firms. You may also want to hire a property management company, especially if you are unable or unwilling to manage the property yourself.

Tax Benefits and Liabilities:

There are tax benefits associated with rental properties, such as the ability to claim depreciation deductions. However, depreciation can also reduce your cost basis, potentially resulting in higher taxes if you sell the property at a profit. Consult a CPA to understand the tax implications.

Insurance and Risk Mitigation:

Obtain landlord insurance to protect against accidents, disasters, and potential lawsuits. This will give you peace of mind during your retirement.

Remember, there is no one-size-fits-all formula for the number of rental properties needed for retirement. It depends on your lifestyle, goals, location, market conditions, and other factors. It is essential to do your research, consult experts, and create a personalized plan that suits your circumstances.

Annuities

There are two main types of annuities: fixed and variable. With a fixed annuity, you know ahead of time how much you will receive, as the rate of return is fixed for a predetermined number of years or for life. This provides a predictable income stream, which can be appealing to retirees. On the other hand, variable annuities offer the opportunity for higher returns, as your payout depends on the performance of a basket of stock and bond products. However, this also comes with increased risk, especially during recessions.

While annuities offer a secure income stream, there are some drawbacks to consider. Annuities often come with high fees and early withdrawal penalties, making them somewhat illiquid. Additionally, the complexity of annuity contracts can make them difficult to understand. The fees associated with annuities can be comparable to or even higher than those of a managed portfolio. Therefore, it's important to carefully consider your short-term and long-term goals, as well as your risk tolerance and comfort with fees, before deciding if an annuity is the right choice for your retirement plan.

High-yield savings accounts

When choosing a high-yield savings account, it's important to shop around for a lucrative APY, consider the requirements for opening an account (such as minimum deposit amounts), read the fine print on fees, and review access limits and online and mobile platforms.

Some high-yield savings accounts to consider include:

• UFB Direct: 5.25% APY, no minimum deposit requirement, and zero monthly fees
• Credit Karma Money Save: 5.10% APY, no minimum deposit requirement, and no monthly maintenance fees
• Varo Bank: 5.00% APY with qualifying direct deposits or a positive balance in both Varo bank and savings accounts
• My Banking Direct: 5.45% APY, $500 minimum opening deposit, no monthly fee, and only $1 needed to earn the APY

Frequently asked questions