As you approach retirement, you start to think more about preserving what you’ve saved rather than achieving aggressive growth. You don’t want to lose the portfolio that you worked so hard to build. However, most people who make it to the age of 65 are living almost 20 years in retirement. Social Security data shows that a man who reaches age 65 can expect to live until 84.3; for women, that age rises to 86.6; and one out of every four 65-year-olds live past age 90. So preservation, though critical, may not be enough.
Inflation Risk to Safety
What’s more, there is another key factor to consider: inflation. Inflation, even though it has been low in recent years, can still rob your savings.
Your portfolio needs to grow at least above the rate of inflation to continue to have the purchasing power you will need in retirement. In today’s economy, bank savings accounts earn less than 1%, so they are not a safe hedge against inflation. While they may preserve capital, you can still lose to inflation in the long term.
Bank savings accounts are good for short-term cash needs in the next year or two, but you should look to other relatively safe options for the rest of your portfolio. Let’s take a look at the top four safe investments that will allow you to sleep at night but still preserve your portfolio from inflation.
Certificates of Deposit (CDs)
Banks offer CDs and insured by the Federal Deposit Insurance Corporation (FDIC), which make them just as safe as a savings account, but you must leave your funds in the account anywhere from three months to 60 months; withdrawing them before that will cost you a penalty.
Some CDs are offered through brokerage companies, but the FDIC likely does not insure them. Interest rates vary based on the time you must leave the money in the account and the dollar amount you have on deposit. Investopedia complies its own list of the best CD rates to help save you time. While these investments are insured, they may earn enough interest to serve as a hedge against inflation.
U.S. Government Bills, Notes or Bonds
U.S. government bills, notes, and bonds, also known as Treasuries, are considered the safest investments in the world and are backed by the government. Brokers sell these investments in $100 increments, or you can buy them yourself at Treasury Direct.
- Treasury Bills: These mature in four weeks to one year. They are sold at a discount to their face value, and then you are paid face value at full maturity.
- Treasury Notes: These notes range from two to 10 years in length. They pay interest every six months that you hold them. They can be sold at a price equal to, less than or greater than their face value, depending on demand. Notes with a higher interest rate will likely have more demand, so their price will probably be greater than their face value.
- Treasury Bonds: These mature in 30 years and pay interest every six months that you hold them. While the interest rate is guaranteed, the purchase price goes up and down, and you can take a significant loss if you need to sell them before maturity.
Municipal Bonds
State and local governments sell municipal bonds to build local infrastructure and other projects for the public good. These are not only safe; they are also tax-free, which can be a great bonus for any savings you have outside an IRA, 401(k) or similar retirement investment. They are not a good option for tax-deferred retirement accounts because they earn lower interest rates than other types of bonds, and you don’t need a tax-free investment for qualified retirement accounts. Be careful though; always check the ratings before buying municipal bonds, as some are safer than others. BondsOnline is an excellent research resource.
Bond Mutual Funds
Bond mutual funds can be an excellent alternative to buying bonds directly. As with any mutual fund, you purchase the number of shares that you want, and a professional money manager researches the best bonds from those included in the fund’s portfolio. The three types of bond funds considered safest are government bond funds, municipal bond funds, and short-term corporate bond funds.
The Bottom Line
Once you get to retirement age, preserving your portfolio becomes a critical issue—but you can overdo it. Putting all your funds in an FDIC-insured bank savings account will not earn you enough money to keep up with inflation. Other slightly more risky investments can minimize the loss of your portfolio to inflation, but still, offer little chance for growth. A portfolio that balances safety and growth is always best.
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There are numerous investments that are considered high risk, usually meaning that there are substantial chances that money invested may be lost. One example is penny stocks, which are cheap shares sold by little-known companies. Hedge funds are high-risk investments that are generally limited to wealthy investors. Currency trading is a risky investment option commonly used by day traders.
There is always risk involved in investing in stocks. Penny stocks, however, can be even riskier. These are shares that are purchased in small, often very obscure, companies at low to very low prices. These companies usually are in a poor financial condition or are start-ups. Adding to the risks are the facts that these companies tend to have substantially more relaxed reporting standards than larger companies offering stock, which means investors have limited information about them. They also trade on a drastically smaller scale, which can make shares more difficult to get rid of.
Hedge funds are high-risk investments. Unlike the bond or stock markets, which are subject to government regulation, a hedge fund is unregulated. The fund’s manager can therefore decide to invest individuals’ money in a wide range of questionable and untraditional ways. Due to lack of regulation, there are no reporting requirements. As a result, the basic terms are generally that a person must invest a substantial amount of money, waive access to all of it for a certain period, and allow it to be used as the fund manager sees fit.
Also among the members’ high-risk investments that are largely unregulated is foreign exchange trading, commonly referred to as forex. These investments involve trading one type of currency for another in attempts to earn profits as the currencies’ values change. Although there are benefits to this type of investing, such as commission-free trading and low initial capital requirements, this type of investing usually requires special skills, training, and a significant amount of research. Even when a person possesses these things, there remains a strong possibility of losses.
Callable certificates of deposit (CDs) are often considered high-risk investments, but not in the same way as many other types of investments. The risk involved here is that a person may not get the expected return. People tend to choose these investments because they usually offer better interest rates than traditional CDs. The risk is presented in the fact that the issuer can call, or basically cancel, the CD if it suits him. If this happens, although the CD holder will receive his principal and some interest, he will lose the opportunity to receive the rates that likely attracted him and will have to search for an alternative investment option.
