Saving for retirement is a top financial priority for most Americans. But once you hang up your hat, you shouldn’t necessarily stop thinking about saving and investing. Here's the ins-and-outs of investing for retirees in a a volatile climate.
There is no doubt that we are in a bear market. When this happens, we naturally look for all the causes. Each bear market or recession has its own cause and effect.
As the stock market swings wildly, investors will be looking for less risky investments to mitigate the impact on their portfolios. Some investors will be tempted by volatility, seeing it as an opportunity. But others will want to avoid risk, especially given the uncertainty of exactly how much the Fed will raise interest rates and the impact that will have on the economy.
Here are some investments for retirees that might provide shelter from volatile stock markets.
High-Yield Savings Accounts
High-yield savings accounts also known as CDs are low risk investment vehicles. They are FDIC insured so you have no risk of losing your investment principle. With these accounts, you are not locking your money up for a specified amount of time, but for that additional flexibility, you tend to get a lower interest rate.
You can open a high-yield savings account at any bank or credit union. There's no minimum balance requirement and the process is typically quick and easy. Depending on your time horizon, adding CDs to your retirement strategy can help offset losses from other investment vehicles. They can also provide a home for excess retirement distributions made from other accounts, such as an IRA or 401(k).
Individual Bonds vs. Using Bond Mutual Funds
Investing your money in bond mutual funds is a popular method with investors. What many people don’t realize is that bond mutual funds carry risks, costs, and tax implications that can be reduced, or even eliminated, by investing in a diversified portfolio of individual bonds, or other fixed-income securities.
That’s because when an investor buys an individual bond, they have two important securities. First, they’re promised a fixed rate of interest for the life of the bond. Secondly, when the bond matures, they’re expected to get their principal back – assuming there have been no defaults. With that assumption, an investor knows exactly what they’re going to earn on the bond that they hold to maturity, they know at what date it will mature, and they know the name of the company they are invested in.
Most investors understand the inverse relationship between interest rates and bond values. When interest rates go down, bond values tend to go up, and when interest rates go up, bond values tend to go down. If something happens in the bond market to cause bond values to drop, a portfolio of individual bonds as well as bond mutual funds will both be affected. However, if you’re holding individual bonds, the loss is simply a “paper loss” because you’re going to still receive your fixed interest payment for the life of the bond, and when the bond matures, you’re still going to get your principal back assuming there have been no defaults.
Investing in income-generating securities is similar to lending your money to the largest U.S. companies that pay you regularly scheduled interest. In the case of bonds, at the end of the loan term, they send you the last interest payment along with the return of your original principal.By owning predominantly income-generating securities, prudent investors can know, with a greater degree of certainty, what their financial future holds. Other investment vehicles such as common stocks and mutual funds don’t offer much certainty at all.
U.S. Treasury Bonds
If you're looking for a lower risk investment, U.S. Treasuries are an excellent choice. Because the U.S. government has never defaulted on its bonds, U.S. Treasuries are one of the more dependable investments available.
With TIPS (Treasury Inflation-Protected Securities), you can get government bonds that have their face value and the interest they pay adjusted for inflation. Because TIPS trades on the open market, their price adjusts to inflation expectations, so you can be sure that your money will be worth more in the future than it is today even if inflation rises over time!
Bonds including, T-bonds, can be a good investment for those who are seeking a steady rate of interest payments. Although bonds and Treasury bonds are popular, they have some disadvantages and risks associated with them and may not be ideal for every investor. So always discuss this option with your trusted Fiduciary advisor before making any investment moves.
Investing in Gold
Gold is seen as the ultimate in safe havens. And it does provide some protection from inflation – just not every year. Timing can make a big difference. At times it can be as volatile as the stock market, but over the long term, it does tend to keep its value. It is a monetary asset, so its best use might be to diversify away from dollar-based investments. It's important to invest with caution when it comes to gold.
If you're interested in investing in gold, it is typically more secure to invest in a gold ETF like SPDR Gold Shares (GLD). This is a way to invest in gold without buying actual physical gold bars or coins. If you want exposure to gold and don't want to deal with storing physical gold yourself, this could be a good option for you.
Investing in Preferred Stocks
Preferred stocks are hybrid investments that have some features in common with both stocks and bonds. You get the ownership stake of stocks, and the potential for appreciation, combined with guaranteed dividend payments similar to the interest payment on bonds. Generally, they’re considered more stable than common stocks, but not quite as steady as bonds.
However, that appreciation potential cuts both ways. You will often see larger swings in market pricing of preferred shares compared to bonds. So why are they dependable investments for retirees? Because preferred stock dividends are a good choice in nearly all cases, meaning you’ll get income no matter what the stock is doing. This also makes them a very good fit for our Income Method, as we look for reliable income streams from our holdings.
CEFs offer diversification as additional protection even in the already relatively less risky preferred securities space. Preferred shares issued by CEFs have both the benefits of the diversification of the CEFs holdings, and those same benefits of being a hybrid investment with stock-like price movements and a bond-like dividend stream.
At the end of the day preferred stocks can be a welcome addition to a portfolio looking for a yield boost.
Investing With Agemy Financial Strategies
Investing should be easy – just buy low and sell high – but most of us have trouble following that simple goals. Understanding these principles and strategies can help you avoid some of the pitfalls that snare some investors.
In the past, market volatility has been an opportunity to pick up more income-producing assets at a good price. But now we are entering a period where market volatility is likely to be higher than normal and economic conditions could be rough. So some investors would like to put some of their assets into investments of greater security.
We are able to help you find a low-risk investment strategy that focuses on cash flow and security first. It's important to look at your finances and see if any of the above strategies could help you in the long run.
At Agemy Financial Strategies, we want you to know we’re here to help you navigate retirement and answer any questions that come up during your retirement process. As Fiduciary advisors, it's our duty to act on your behalf in finding the right solutions for your individual wants and needs.