Creating an investment portfolio for an older person is a different proposition from doing one for someone in his 20s who has decades to make up for market losses. The elderly cannot wait out a volatile market like those who are just entering the workforce, so their portfolios must be crafted more conservatively, with an eye toward conservation of principal. Creating an effective portfolio for a senior citizen can provide him with financial security as long as you do your homework and use some common sense.
Designing an Elderly Investment Portfolio
Step one is to determine the risk tolerance (amount of investment loss that can be absorbed), time horizon (how long the money must last) and investment objectives (growth, income, capital preservation, tax avoidance) of the senior citizen. Even though the portfolio will be fairly conservative, he may still be comfortable having a fair amount of his portfolio in non-guaranteed instruments.
If he has a long life expectancy, then he may be more concerned about making income last. If he is completely risk-averse, then make sure that he understands that he will earn little on his principal. The first step in constructing any sound investment portfolio is always communication.
Deciding on Investment Types
Add a selection of conservative equities to the portfolio to provide an element of growth and protection from inflation. Purchasing technology or other sector funds that rise and fall in a cyclical manner is an unsound choice for a senior citizen.
A large-cap growth fund that invests in large, household name blue-chip companies is a better investment for the senior. The percentage of the portfolio that goes into this type of investment will vary according to the risk tolerance and time horizon of the investor, but if the time horizon is less than 10 years, then exposure to equities should probably be limited to a quarter of the portfolio at most.
Purchase a selection of conservative fixed-income instruments, such as preferred stocks that pay a higher rate than guaranteed investments, yet still stay relatively stable in price. Utility stocks can also provide steady dividends over time with minimal price volatility. These instruments can increase the investor's monthly income without incurring substantial risk to principal.
Anchoring the Elderly Financial Portfolio
Anchor your portfolio with a mixture of guaranteed instruments, such as treasury securities, CDs and savings bonds. Treasury inflation-protected securities can provide a further hedge against inflation while guaranteeing principal. Fixed and indexed annuities can also provide safety of principal and guaranteed income on a tax-deferred basis.
Variable annuities that invest in variable mutual fund subaccounts may also be appropriate as long as the investor is willing to annuitize the contract, which results in the annuity paying out a stream of income that the investor cannot outlive, even if all of the proceeds in the contract are exhausted. A variable contract would work in this case because the investor could purchase a living benefit rider in the contract that promises a monthly payout based upon a guaranteed rate of growth in the contract.
The investor will receive either the guaranteed payout or a larger payout if the mutual fund subaccounts grow at a faster rate than the guaranteed rate.
Using Cash in Your Portfolio
Keep at least a small portion of the investor's portfolio in cash to provide a measure of liquidity. An older person may need to withdraw a chunk of money for many reasons, such as to pay medical bills or long-term care expenses. Allocate some of the holdings into publicly-traded securites that can be liquidated quickly, if necessary. Most annuity contracts will also allow the owner to withdraw a portion of the contract value, such as 10 percent each year, without penalty.
Mark Cussen has more than 17 years of experience in the financial industry. He received his B.S. in English from the University of Kansas and became a Certified Financial Planner in 2001. He has published financial educational articles on such websites as Investopedia and Money Crashers. He also provides financial education and counseling for members of the U.S. military and their families.