Retirees in the United States commonly hold onto at least one responsibility: safeguarding the earnings they accumulated during their working lives, ensuring it is not lost due to financial market risks or excessive spending.
All money managers will confirm that this advice is exceptional. Furthermore, they will state that it is acceptable to seek favorable returns on an investment while choosing low-risk strategies.
Preparing and shifting to a new mindset is necessary when readjusting your portfolio strategy to minimize risk.
When realigning your portfolio strategy, it is crucial to engage in proper preparation and adopt a new mindset in order to reduce risk.
Paul Tyler, the chief marketing officer of Nassau Financial Group in Hartford, Connecticut, advises that during your working years, it is recommended to allocate around 70% of your portfolio to equities and 30% to fixed-income products. However, as retirement approaches, it is commonly advised to adjust this allocation to a 60%-to-40% split between stocks and defensive investment options such as bonds and annuities.
Tyler adds, “By doing this, you minimize the risk of being thrown off course by market storms in the future.”
If you’re unsure where to begin when realigning your retirement portfolio, consider starting with these six low-stress but high-return potential investments. These options prioritize both safety and security, providing gains in terms of capital preservation and income rather than focusing solely on portfolio growth.
Bonds are financial instruments.
CDs, also known as Certificates of Deposit.
Stocks that pay dividends.
Shares of stock that are given priority over common shares in terms of dividends and liquidation preference.
Accounts with a high yield for savings.
Bonds have long been a fundamental investment option for retirement investors, thanks to their conservative nature. Senior clients often receive recommendations from wealth managers to invest in bonds due to their reliable income generation, safeguarding of portfolios, and potential for enhancing other retirement income sources like Social Security, 401(k), IRA, and pension payments.
According to Bradley Thompson, a financial planner with New Canaan Group in New York, bonds are inherently conservative investments and serve as a valuable tool for mitigating risk in a portfolio. This is due to their characteristic of offering a fixed payment over a predetermined duration.
Thompson suggests that in mid-2023, when interest rates are significantly higher than the pre-pandemic era, investors may find it suitable to consider a combination of government-issued Treasury bonds and high-quality corporate bonds that offer higher interest rates due to their sensitivity towards rising rates.
Retirees residing in high-tax states like New York, California, and Massachusetts, or belonging to high tax brackets, find municipal bonds appealing.
According to Thompson, the reason behind their higher yields compared to Treasury or high-quality corporate bonds is due to the inclusion of tax savings.
Bank savings rates in 2023 are experiencing an upward trend due to the presence of high interest rates. This positive trend can also be observed in certificates of deposit, where savings returns have reached historically high levels. For instance, 12-month CD rates are offering returns ranging from 5% to 5.3%. Similarly, some six-month CD rates are also reaching 5% in August.
Bank and credit union certificates of deposit (CDs) are beneficial for investors who prioritize security. Similar to other bank savings options, these CDs are safeguarded by the U.S. Federal Deposit Insurance Corp. for amounts up to $250,000. This federal insurance ensures the protection of U.S. bank deposits. According to Thompson, CDs provide an excellent starting point for investors as they offer attractive rates and insurance coverage, as long as the investor remains within the FDIC limit.
However, CDs possess additional qualities that enhance their value in terms of generating income and ensuring safety. One notable aspect is the inclusion of a beneficial feature for older individuals called a “death put,” which serves as an estate planning advantage.
According to Thompson, the concept is that if an individual buys a five-year CD at a 5% interest rate and unfortunately passes away within the first year when rates have increased to 6%, the inheritor of the CD can choose to have the issuer repurchase it. This enables them to reinvest the funds at the higher 6% rate or utilize it to cover any remaining expenses.
Retirees should prioritize capital preservation when it comes to their investments. However, they can consider stable and reliable stocks that align with their investment requirements and objectives, allowing for a certain degree of risk.
Richard Gardner, CEO of fintech product and services provider Modulus Global in Scottsdale, Arizona, explains that as investors approach retirement, their limited time to recover losses leads them to adopt a more cautious and risk-averse approach. He emphasizes that the choice of investments should be tailored to each investor’s level of risk aversion.
Dividend stocks have the potential to make a significant impact in that regard.
Blue-chip stocks typically come with dividends, which offer consistent income to shareholders while also protecting them from the fluctuations of the stock market.
Blue-chip dividend stocks offer a reliable combination of income and growth for retirement investors who are open to taking on more risk. These stocks can consistently generate income for retirees in the long run.
According to Hartford Funds’ latest study on returns through December 2022, dividend stocks have proven to be durable and profitable. Since 1960, approximately 69% of the total return of the S&P 500 can be attributed to reinvested dividends and compounding.
Preferred shares offer investors a distinct advantage by providing them with exclusive access to a publicly traded company’s financial distributions, precisely as suggested by their name.
In the case of bankruptcy or liquidation, preferred stockholders are prioritized over common stockholders and placed behind bondholders. They typically receive a predetermined dividend amount before any dividends are distributed to common stockholders.
Although preferred shareholders do not possess voting rights, their shares typically provide higher returns compared to common stocks or bonds. Moreover, they are generally less susceptible to volatility, particularly during turbulent market conditions.
Preferred shares, on the contrary, possess greater intricacy compared to common stocks or bonds, rendering them potentially more challenging to comprehend.
According to Jeffrey Wood, a partner and investment advisor at Lift Financial in South Jordan, Utah, preferred shares may still experience price volatility, especially during market downturns. He explains that these shares may have call features, which allow the issuer to redeem them at a specific price. This can potentially expose the investor to reinvestment risk.
During periods of elevated inflation and increasing interest rates, retirees can rely on high-yield bank savings accounts to generate a consistent and dependable income.
According to the FDIC, as of July 2023, the average interest rate for basic bank savings accounts was 0.42%. However, in August, many banks and credit unions were offering high-yield savings accounts with interest rates as high as 5%.
CIT Bank provides a Platinum Savings account with a 5.05% interest rate, requiring a minimum deposit of $5,000. On the other hand, My Banking Direct offers an even more attractive option with their High Yield Savings account, featuring a 5% interest rate and only a $500 minimum deposit.
In addition to providing higher interest rates, high-yield bank savings accounts offer account holders the advantage of strong liquidity. This means that individuals can access their funds promptly and without any associated fees, even in urgent situations.
Annuities, similar to bonds, CDs, and other investments designed for retirement, serve as valuable tools for retirees, assisting in managing expenses and offering essential income during their post-employment phase.
Fixed annuities, specifically designed to ensure a consistent interest rate for a defined duration, present retirees with an opportunity to secure current high rates that can generate substantial future income. However, it is important to acknowledge the potential drawbacks.
“These investments offer tax advantages as gains can accumulate without being taxed, but there are penalties for early withdrawal before reaching retirement age (59 ½),” explains Thompson. “Moreover, investors may face restricted access to their funds and incur termination penalties if they need to withdraw the money. Therefore, it is advisable to carefully review the terms and conditions before making a purchase.”
A deferred income (or longevity) annuity is suitable for those who do not require immediate access to funds and have concerns about the longevity of their finances. This type of annuity provides significant payouts, although the payments usually commence at a later stage in life, making it an excellent solution, as stated by Thompson.
Diversification and Risk Reallocation in Retirement
Investing in low-risk, high-opportunity investments is a wise financial decision to strengthen your retirement portfolio. However, there is an additional step to take in order to safeguard your investments for retirement.
According to Sundip Patel, CEO of Avana Capital, diversifying your retirement investment portfolio is crucial for ensuring consistent and risk-adjusted returns while fostering financial well-being. This step becomes particularly important once your working years come to an end.
Portfolio diversification involves distributing investments across various asset classes to mitigate the risk of incurring significant financial losses. This strategy aims to prevent the scenario where an investor’s entire retirement funds are concentrated in a single investment, thereby reducing the potential for a substantial loss.
According to Bradley Thompson, a financial planner from the New Canaan Group in New York, timing is crucial. If you plan on reducing risk during retirement, it is advisable to start preparing three to five years ahead.
By diversifying your retirement assets, you can reduce the potential risks and fluctuations that can severely impact your investment portfolio. This approach not only helps to minimize or even prevent portfolio volatility but also ensures that your capital preservation strategy remains on course for a retiree.
It is recommended for retirement investors to regularly assess their allocation and ensure that their investments are in line with their objectives. It is even more advantageous to do so prior to retiring.
According to Thompson, it is crucial to consider timing when it comes to retirement planning. If you intend to minimize risks during retirement, it is advisable to start preparing at least three to five years beforehand. As individuals approach retirement age, they are likely to be earning the highest income of their careers. However, unforeseen circumstances such as job loss or illness can significantly impact their earning potential, making it difficult to recover.
Selling investments at the last moment may lead an investor to sell into a market downturn, thereby increasing the risk.
Thompson suggests that by progressively decreasing your risk as you approach retirement, you may be able to prevent selling at the most unfavorable moment.
Imagine an investor who, in 2021 while the market was at its peak, chose to retire at the conclusion of 2022. This investor patiently held on to minimize risk.
According to Thompson, if individuals had a larger stake in stocks in 2022, they might have had to reconsider their strategy as they delayed it by a year. However, Thompson recognizes that most investors still require a certain level of risk in their portfolios to achieve their objectives.