With the cost of living getting higher each year and people living longer lives, it’s imperative to invest a portion of your retirement savings to avoid the possibility of running out of money.
For most retirees, investing in funds that trade stocks, REITs, IPOs, or junk bonds is too risky for the long term, even though they have the potential to offer high returns. The goal for most is to minimize risk while still getting decent returns on your money.
There are many ways to invest your hard-earned retirement savings while limiting your exposure to risk. You’re probably not going to see high returns, but at least you’ll be putting your money to work for you.
1. U.S. savings bonds
U.S. Savings Bonds (1), like other U.S. Treasury securities, are back by the United States Federal government and are very unlikely to default—making them a very stable investment.
U.S. Savings Bonds come in two types: Series I and Series EE. You can buy a Series I bond with either a fixed interest rate of return or an adjustable, inflation-linked return, which has an inflation adjustment as part of the total return. The fixed rate won’t change, but the inflation return rate is adjusted every six months. If it’s negative, it could bring your total return down.
Series EE bonds have a fixed interest rate added to the bond at the end of each month. Return rates for both are very low right now—between 0.10 and 2.52 percent, depending on which type you purchase.
Certificates of Deposit, better known as CDs, are savings certificates issued by commercial banks. They have fixed maturity dates and interest rates. Generally, you do not have access to the funds until the CD maturity date. If you withdraw funds from your account early, you could incur a penalty.
Returns were dismally low for several years, but are now starting to inch their way back up. Since CDs are issued by commercial banks, there is some risk of the bank failing. However, should that occur, your investment is insured by the FDIC (2) for up to $250,000 per account.
3. High interest savings accounts
“High interest” is a bit of a misnomer. The rate of return is actually not high at all; they are currently hovering around the 2 percent range, give or take a few tenths of a percent here and there.
Some of these accounts can be opened with as little as $1, whereas others require a much larger deposit in order to qualify for the highest interest rate offered. But if your goal is to park your cash someplace safe, why not earn a little interest on it, too? This type of investment account is also insured against loss by the FDIC.
Look for banks offering low- or no-fee accounts, online access to manage your account, and quality customer service.
With annuities, you are essentially letting an insurance company hold onto to your money in exchange for a return that can be fixed (fixed annuity) or variable (variable annuity). Another type of annuity pays returns based on the performance of the stock market (equity indexed annuity).
Annuities can be complex financial instruments to understand, so it pays to seek out the advice of a trusted financial advisor before signing any agreements or contracts. The least risky annuities are the types paying a fixed return. Be aware that annuities are not backed by the federal government; they are backed by the company holding your money or another company that insures the company offering the annuity.
5. Money market accounts
Money market accounts (MMAs) are an interesting investment vehicle in that like savings accounts, they pay interest on your money, but also come with check-writing features like a regular checking account.
The downside of MMAs is that they restrict the amount of checks you can write during a given period, making them less liquid than checking accounts but more than bonds, for example. They may also require you to keep higher minimum balances in order to receive the highest interest rates.
The upside is that MMAs generally pay higher interest rates than savings accounts, and your investment is backed by the FDIC for up to $250,000 per account.
6. No fee, interest bearing checking
Lately—ever since strictly online checking accounts started being offered—the banking industry has gone through a big shift in the way it provides services to customers. Because many of them have no brick-and-mortar branches, they also don’t have the overhead of having to pay staff, utilities, and so on.
Although interest rates tend to be very low, many of them now offer no-fee, interest-bearing accounts with much smaller deposits than what was required by traditional banks in the past. Look for banks with excellent online account management tools, quality customer service, and no-fee ATMs. Like traditional banks, your deposit is FDIC-insured for up to $250,000 per account.
If you have the money to invest, there are many ways to grow your retirement nest egg without incurring too much risk. Don’t expect huge windfalls, but you can at least rest assured that your money is working for you and providing you with extra streams of income.