Bonds
A bond is essentially a loan that you give to a company, your local municipality, or the government. They use your money to grow their business or provide services and, in return, pay you interest. Eventually, you get back the principal.
Bonds fall into three basic categories:
Short term (fewer than five years): These tend to be lower risk but provide lower yields, and performance is largely dependent on Federal Reserve policy decisions. If you need to have the principal back within three years, these are your best bet.
Intermediate term (5-10 years): These make up the lion’s share of bonds issued and tend to be favored when interest rates are uncertain. Less risk than long term, better rates than short term.
Long term (more than 10 years): Your money stays here longer, which can reap more interest but also opens the door to interest rate fluctuations. Performance relies heavily on the fortunes of the market.
Bonds are not designed for turbocharged rates of return but are instead a slow and steady source of income.
Immediate annuities
Annuities are contracts sold by insurance companies that can provide a steady, tax-deferred income regardless of changes in the market. They also provide a financial shoulder to lean on should you outlive your savings.
Immediate annuities come in two basic flavors:
Variable annuities: Similar to mutual funds, these allow unlimited contributions and full control over the investment.
Fixed annuities: These guarantee a locked interest rate, typically for 1-10 years.
You can also tweak payout options depending on your marital status as well as when and how you anticipate needing the funds.
Retirement income funds
These specialized mutual funds automatically spread your money across a variety of diverse bonds and stocks in order to provide reliable monthly income. Unlike many other investment vehicles, the principal remains under your control and available should you ever need it. The downside is that any withdrawal you make from the principal will reduce future monthly payments.
Real estate
If you do your homework and know the risks going in, rental property can be a useful part of a solid investment portfolio. Whether you flip a flat in a prime location, remodel a house in an up-and-coming suburb, or maintain an apartment complex or commercial office, there are many ways to use real estate to establish a steady stream of income. Another option is a real estate investment trust (REIT), where you invest in a team of professionals to handle all aspects of property management.
There will be unexpected expenses, regular upkeep and periods when properties go vacant. But with patience and diligence can come great rewards.
Safe (boring) investments
As yawn-inducing as they may sound, it’s always smart to keep a portion of your retirement funds in safe, predictable investment vehicles. This protects at least a portion of your nest egg, while the rest of it can be out gallivanting in the markets, taking those risks that can generate greater returns.
Bank savings accounts: Familiar to us all, these are easy to open, safe and fully insured by the FDIC. You can put money in and take it out whenever needed. You will owe taxes on earned interest.
Certificates of deposit (CDs): CDs are also quite safe and FDIC insured, just with a higher minimum investment (usually around $1,000).
U.S. Treasury-issued securities: Cheap to open (as low as $25) and reliable, these include Treasury bonds, savings bonds, bills and notes.
Money market mutual funds: Typically run by an organization that has a team of professional traders and analysts, money market mutual funds are a popular way to manage cash, though they can have low returns.
In addition to these reliable options, it’s always good to maintain an emergency fund, on the chance that life throws a sharp curveball your way.
Keep it simple
At the end of the day, a simple approach will likely keep your portfolio healthy and keep you sane. As retirement draws closer, gradually move in a more conservative direction, reducing your risk in the event of a downward shift in the market.
It may seem daunting at first glance, but you don’t have to walk this tightrope alone. A wealth advisor may be the partner you need on this journey. Our checklist can be a useful tool to help you find an individual or firm that shares your vision and meets your needs.