People typically want to make money, and most people want to make money while assuming as little risk as possible. The loss of principal is a possibility with non-insured investment vehicles. People often become more conservative investors as they age, because they do not want to lose money under any circumstances. The idea of trying to recoup losses when there are a limited number of years before the money may be needed can be worrisome. Seniors often want the comfort of knowing their resources are available when needed.
Insured Investment Vehicles
Insured investments are the safest kind of investment, because there is no risk of losing money. The investor is assured of receiving initially invested funds and interest earned over a period of time. The Federal Deposit Insurance Corporation (FDIC) insures certificates of deposit (CDs). CDs are sold by financial institutions, and interest rates vary. Generally, the safer the investment, the lower the interest rate. CDs carry no risk, so interest rates are the lowest offered on fixed-income securities. Many retirees obtain at least part of their income from interest and dividends from their investments. When interest rates decrease, their income plummets. This is what happened in the latter half of the 2000s, which featured the lowest interest rates in decades.
Treasury securities, including notes, bills and bonds, are not insured, but they are considered safe investments, because they are backed by the U.S. government. The downside to safe investments such as CDs and Treasuries is that returns are low. Safe bond investments that hedge against inflation are Treasury Inflation-Protected Securities (TIPS). TIPS offer regular interest payments and the return of principal at maturity. As a hedge against inflation, the interest payments readjust periodically based on an inflation benchmark. There is a final modification to principal at maturity.
Asset allocation is an important means of combining safe investments with investments offering a better return and opportunities for growth and capital appreciation. The investor over time loses buying power to inflation if only the safest investments are purchased. Income and principal will be unable to keep pace with cost of living increases. Individual securities of any kind can be risky. To reduce risk, the investor can buy a stock or bond mutual fund or exchange traded fund (ETF). If a bond issuer cannot meet payment obligations, or a stock price plunges, or a company goes bankrupt, the mutual fund investor will not be as negatively impacted as he would be if the security were held in an account. A fund can absorb the impact and rebound quicker than an individual investor.
Fixed-income securities provide returns in the form of interest payments while preserving principal. Investing in investment-grade, high-quality bonds, but not necessarily insured vehicles, provides better returns than insured securities. Investors should also take advantage of tax-advantaged municipal bonds that minimize the tax bite of interest and dividend income. Short-term funds invest in securities maturing in less than two years. Medium-term bond funds hold bonds maturing in two to 10 years. A bond fund with the majority of securities maturing in five years or less minimizes interest-rate risk. You should make sure the funds invest the majority of their money in investment-grade vehicles, either corporate or municipal bonds.
Retirees of all ages should consider having a small portion of their assets invested in stocks. Stocks may provide some income in the form of dividends. They also offer the opportunity for growth in the form of stock price appreciation. The best stock investments with a conservative twist are index funds and large-cap mutual funds. A small amount of money also could be invested in international stocks. Retirees generally should avoid volatile small-cap stocks.
Paying off mortgages may be the best and safest investment an individual soon to retire, or already retired, can make. The reduction in fixed monthly expenses results in less pressure to maximize income and perhaps invest unwisely in risky investments. It allows funds to remain invested for growth and future requirements.
- The Motley Fool: Retirement Center: Where to Invest Your Money
- CNNMoney: Investing in the Home Stretch to retirement
- U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy. "What Are Corporate Bonds?" page 1. Accessed July 31, 2020.
- U.S. Department of the Treasury, Bureau of the Fiscal Service. "Treasury Bills." Accessed July 31, 2020.
- U.S. Department of the Treasury, Bureau of the Fiscal Service. "Treasury Notes." Accessed July 31, 2020.
- U.S. Department of the Treasury, Bureau of the Fiscal Service. "Treasury Bonds." Accessed July 31, 2020.
- U.S. Department of the Treasury, Bureau of the Fiscal Service. "Treasury Inflation-Protected Securities (TIPS)." Accessed July 31, 2020.
- U.S. Securities and Exchange Commission. "Investor Bulletin: Municipal Bonds – An Overview." Accessed July 31, 2020.
- Federal Deposit Insurance Corporation. "Deposit Insurance FAQs." Accessed July 31, 2020.
- National Credit Union Administration. "Share Insurance Fund Overview." Accessed July 31, 2020.
- Financial Industry Regulatory Authority. "U.S. Treasury Securities." Accessed July 31, 2020.
- Fidelity. "Bond ratings." Accessed July 31, 2020.
Meryl Baer worked at a financial firm for 15 years, researching investments and writing newsletters and marketing materials. She also worked at two business schools as an English/business writing instructor, department head and placement director. Baer holds a master's degree in American studies from Pennsylvania State University and a master's degree in business administration from Robert Morris University.