Investing Best Low-Risk Investments
As you get closer to your retirement date, losing money can have a whole new meaning. Unlike younger investors who typically have more time to “make up” for losses, those approaching retirement are generally more concerned with keeping principal safe so that some—or all—of it may be used as a base for generating a future income stream.
With that in mind, allocating a portion of your portfolio to low-risk investments is often the way to go—particularly if those financial vehicles can also generate a nice return that may help keep pace with inflation and future purchasing power.
Best Low-Risk Investments
Because everyone can have different goals, risk tolerance, and time frame until retirement, there isn’t just one single investment that is right for all investors and retirees across the board. However, some of the more common low-risk investments can include the following:
- U.S. Treasuries
- Bond Funds / Income Funds
- Blue Chip and Dividend-Paying Stocks
- Treasury Inflation Protected Securities (TIPS)
- Real Estate Investment Trusts (REITs)
- Permanent Life Insurance
- Fixed / Fixed Indexed Annuities
U.S. Treasuries
The U.S. government provides the opportunity to purchase fixed-income securities. These include Treasury bills (also referred to simply as T-bills) and Treasury bonds. The money loaned to the government by investors is often used to fund different types of projects and needs, such as road construction or building parks.
Treasury notes, bills, and bonds all have different maturity lengths—and the longer maturities will usually equate to the longer commitment. In addition, United States Treasuries can also offer nice tax-related benefits, too. For example, the interest received from T-bills is not taxable at either the state or local level. Therefore, even though the return on Treasuries is relatively low, investors can net more spendable income due to the tax-free nature of these financial tools.
Bond Funds / Income Funds
There are many different types of mutual funds available in the marketplace. Each has its own objective, such as growth, income, or principal protection. A bond mutual fund could be a good option for investors looking for a lower-risk financial vehicle with the opportunity for higher return. These mutual funds primarily invest in bonds—including government, municipal (“muni”), corporate, or convertible—and other types of debt instruments like mortgage-backed securities.
Bond funds will generally provide interest income to their investors’ portfolios through dividend payments. These represent the total interest payments made by all of the bonds in the mutual fund’s portfolio.
Owning a bond fund can be a viable way to hold a diversified portfolio with fixed-income securities without purchasing many different individual bonds. Therefore, these—and other—mutual funds can be a good way for investors to spread out risk, but without the need to contribute a great deal of capital to the investment.
Blue Chip and Dividend Paying Stocks
While the value of stock shares can rise and fall regularly due to market conditions, some types of stock are less risky than others. These can include blue-chip or dividend-paying stocks.
Blue chip stocks are shares of large companies that are well-established and that have a history of dependable earnings. For instance, these companies will typically have a market capitalization of billions of dollars. While the share price of blue chip stocks may rise and fall, they generally are less volatile than smaller or start-up companies’ shares. Some examples of blue chip stocks include Boeing, Coca-Cola, and IBM.
Dividends are payments that are made to the company’s shareholders. They represent distributions of the company’s earnings. The investors may receive dividends either in the form of a check or as additional shares of stock. (Mutual funds that own dividend-paying stocks also pay dividends to their shareholders).
Many investors use dividends as a retirement income stream. However, these shares can also offer the opportunity to attain growth—and often, the amount of this growth may be more than what is earned with other safe money alternatives like fixed-income securities.
It is important to note that while some blue chip stocks pay dividends, they do not necessarily have to do so. In fact, in no case are dividends guaranteed. Therefore, if a retiree is relying on dividends for a portion of their overall income, it is recommended to have other, more reliable sources of incoming cash flow as well.
Treasury Inflation Protected Securities (TIPS)
Treasury Inflation-Protected Securities, or TIPS, are a type of debt investment the United States government offers. These safe money options provide both interest and added principal to help protect investors from inflation. The adjustment is made based on changes in the CPI (Consumer Price Index).
These investments may be purchased for as little as $100 by investors. There are many different maturity lengths, including five years, ten years, and even as long as thirty years.
Rather than paying out interest as it is earned, the investors who own Treasury Inflation Protected Securities are instead paid the higher value when the TIPS mature. Note, however, that deflation in the economy may cause the value of TIPS to be reduced. Therefore, there is still some risk that can come with investing in these types of securities.
Real Estate Investment Trusts (REITs)
Many investors seeking a steady income stream will invest in REITs. Real estate investment trusts, or REITs, are companies that own, operate, or finance income-generating property.
Like mutual funds, a real estate investment trust will “pool” the capital it receives from numerous investors who are then eligible for dividends, but without having actually to purchase and manage the real property.
In most cases, the actual share price of a REIT does not fluctuate very much. However, these particular investments are considered lower risk and can be enticing for retirees because of the potential regular income stream they provide.
Permanent Life Insurance
Although many people don’t consider life insurance an investment, this financial tool can provide many enticing advantages—including guaranteed, tax-deferred growth and principal protection in any type of stock market environment.
Permanent life insurance includes death benefit protection and a cash value or investment component. There is no tax on the gain in the cash component unless or until it is accessed as a withdrawal.
In some cases, permanent life insurance policyholders will take out a policy loan to supplement retirement income or several other needs. In this scenario, the loan does not represent a taxable transaction.
Further, even though the loan accrues interest, the balance does not necessarily have to be fully repaid. Rather, if there is still an unpaid amount when the insured dies, it can be paid off using proceeds from the death benefit. Then, the remainder of the funds are paid out to the named beneficiary(ies).
In addition, the interest will continue to be generated on the cash account as if the full amount of dollars were still there. For instance, if a policy has $100,000 in cash value, and the policyholder borrows $25,000, tax-deferred growth will still accumulate as if the cash component was still valued at $100,000.
Fixed / Fixed Indexed Annuities
Both fixed and fixed-indexed annuities are considered low-risk financial vehicles. But these flexible tools may also provide a higher and tax-advantaged return. For example, fixed annuities generate a small amount of growth but with no risk to principal or previous gains—even in the event of a significant stock market correction.
The insurance company that offers the fixed annuity will typically set a rate for a certain period. This rate may be guaranteed for a preset number of years. However, there is also usually a guaranteed minimum floor rate below which the return will never fall—even after the rate guarantee period has elapsed.
Because the funds inside the annuity’s account are allowed to grow on a tax-deferred basis, there is no tax due on the gain until the time of withdrawal—which could be many years in the future. This can allow for exponential growth because the funds are generating interest on the principal, as well as on the prior gains, and on the amount that would otherwise have been paid out in taxes over time.
Tax-Deferred versus Taxable Growth
Fixed annuities can also provide a guaranteed stream of income either for a certain period, like 10 or 20 years, or for the remainder of the income recipient’s (i.e., the annuitant’s) lifetime—no matter how long that may be. Therefore, fixed annuities are often used to ensure that retirees have an “income floor” that can be counted on indefinitely.
A type of fixed annuity is the fixed indexed annuity (FIA). These annuities are structured similarly to regular fixed annuities. However, the big difference comes in how the return is calculated.
FIAs track their return based mainly on the performance of one or more underlying market indexes, such as the S&P 500 or the Dow Jones Industrial Average (DJIA). If the index performs well during a given annuity contract period, a positive return is credited to the account—usually up to a preset limit, or “cap.”
In return for this limited upside, though, no loss is incurred to the principal (or the prior gains) if the underlying index performs poorly in a given period and ends with a negative return. In fact, even during times of negative market performance, the fixed indexed annuity may be credited with a guaranteed “floor” rate of 0% or more, depending on the annuity and the insurance carrier.
Therefore, in many ways, fixed-indexed annuities can offer both investors and retirees a “best of both worlds” scenario. Similar to other types of annuities, the growth that takes place in an FIA is tax-deferred.
A regular stream of income may also be generated from fixed-indexed annuities. These funds can be paid for a particular period or throughout the entire lifetime of the annuitant. If the joint life income option is chosen, income will continue throughout the life of two individuals, such as a husband and wife.
Making the Best Tradeoff Between Growth and Safety
Although most investors and retirees hope to attain growth while keeping assets safe, there are many instances where one must be chosen over the other. For example, money markets and certificates of deposit (CDs) will generally retain their value in any stock market environment. But with such low-interest rates in today’s market, these financial vehicles won’t produce enough return to meet, much less beat, inflation.
With that in mind, it is essential to weigh the differences in any type of investment you choose. Keeping the financial vehicles you choose in line with your short- and long-term objectives is also essential.
If you are seeking growth opportunity, along with principal protection, you can use one or more of the above investment options in several ways. But because your short- and long-term financial objectives can differ from those of other investors and retirees, it is recommended that you first discuss your specific needs and goals with an experienced retirement specialist.
