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Making Your Retirement Savings Last: Safe Investments for Retirees

    

SUMMARY: With people living longer than ever before, it’s possible you’ll spend several decades in retirement. Make sure your savings are going to keep up with this increased longevity.

We are living longer than ever before, which means we could spend several decades in retirement. On the one hand, more time to spend on your post-work adventure is certainly exciting. On the other, your savings need to keep up with this increased longevity.

Your investment strategy will be a key factor in stretching your nest egg to its full potential. Many retirees adopt a more conservative approach, allocating more of their portfolios to investments that carry less risk. Below are a handful of such options to consider as you ponder how to maintain your standard of living over the long haul.

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Certificates of deposit (CDs)

CDs are federally insured time deposits issued by banks that usually have higher interest rates than traditional savings accounts and mature in anywhere from a few weeks to a few years. The bank pays interest—nearly 3 percent, in many cases—and, eventually, returns the full principal.

CDs are generally safe, but falling interest rates can have an adverse effect on reinvestments, as can inflation and taxes. You can withdraw funds before the CD reaches maturity but will face a penalty.

Money market accounts

Think of a money market account as your traditional savings account with a shot of espresso—higher minimum balance, higher interest, relatively liquid. The ideal place to park your emergency fund. The tradeoff here is some limits on the frequency of withdrawals.

Inflation is the primary risk factor with money market accounts. Make sure the account is FDIC-insured (most are, but not all).

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Treasury securities (bills, notes, bonds and TIPS)

In order to pay some of its bills, the U.S. government issues securities through the Treasury, making them one of the safest investments out there. These come in a variety of flavors:

  • Treasury bills: These sell at a discount (say, $980 for a $1,000 bill), mature in about a year and don’t generate interest.

  • Treasury notes: Available in denominations of two, three, five, seven and 10 years, notes generate interest every six months until maturity. Your return will depend on investor demand (high demand = lower return).

  • Treasury bonds: These are nearly identical to notes, except they mature after 30 years.

  • TIPS (Treasury inflation-protected securities): The principal moves in accordance with inflation and the government pays interest to accommodate it.

The values of Treasury securities fluctuate with interest rates. Your bond will seem less appealing as rates rise, as new bonds will then yield higher returns.

Government bond funds

Among the safest investments, these are mutual funds that invest in U.S. government debt securities, such as Treasury bills, bonds or notes, as well as mortgage-backed securities from Fannie Mae and Freddie Mac. They can be adversely affected by inflation.

Municipal bond funds

Similar to the function of Treasury securities for the federal government, municipal bond funds are issued by state and local governments to provide funds for projects and debt service. There are no federal income taxes on interest, and in some cases no state or local taxes.

The one real risk with these funds is on the rare occasion that the state or city goes bankrupt and is unable to make further payments.

Real estate investment trusts (REITs)

REITs hold mortgages or equity in property and represent a low-risk opportunity to invest in the real estate market. Investors receive dividends at a higher yield than what is typically available from stocks. REITs are not correlated with the stock market and, therefore, tend to hold steady when the market declines.

S&P 500 index fund

Although stocks are known to be high-risk investments, an S&P 500 index fund is a lower-risk option that is worth consideration. Based on the 500 largest American companies, it provides higher returns than a typical bank investment product.

As with any fund, this vehicle has diversification built in, with companies representing a wide variety of industries, which provides a further level of resiliency. You can expect approximately a 10 percent return.

As stocks go, the S&P 500 fund has the least amount of risk attached, due to the high success rate of the market’s top companies. But a certain amount of volatility should still be expected.

Keep your assets diverse

There’s no one-size-fits-all solution to retirement investing, but the general rule persists that a diverse pool of assets will serve you well through periods of uncertainty. A wealth advisor may be a useful ally in assembling the ideal portfolio.

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