Investment Strategies for Retirees
Retirees need different growth strategies than those just getting started. Here’s a look at the best investment strategies for retirees to try.
For most of us, investing is synonymous with investing for retirement. After all, while 55% of Americans own stocks, most of them own stocks exclusively through their retirement account.
The thing is, you don’t need to stop growing your money after you retire—in fact, you shouldn’t! You have a lot of adventures still waiting for you, and you need your money to get you there. You just need to use different investment strategies than you did when you were working.
Here’s a look at some of the best investment strategies for retirees.
The Rules of Investing After You Retire
First, it helps to understand the rules of investing after you retire, as these look quite different than they did when you had a steady income.
Basically, since you’re now living on the savings you accrued over a lifetime rather than an income, you don’t have an income to fall back on. You don’t have decades to recover from losses, either. This means you have to be mindful of how you use your resources.
In simple terms, you’re now concerned with capital preservation over growth. In other words, some growth is good, but you don’t want to lose any money to get there. This means that you should generally opt for low-risk investments (even if they have low returns).
You should also separate out any assets you plan to live on from assets you hope to pass on as a legacy. This will give you a better idea of what resources you actually have. From there, you should break your retirement down into stages. A common model is the five stages of retirement, which would allow you to use the bucket strategy. Another option is to break your retirement into five-year increments using the cover-the-basics strategy, in which you match fixed expenses with fixed income, treat the rest as investable income, and reevaluate every five years.
The Best Investment Strategies for Retirees
Once you have your playbook, you’re ready to look into investment vehicles. Again, you’re looking for low-risk options since you don’t have much time for growth. Here are some of the best options available right now.
Alternative Investment Funds
Alternative investment funds are funds explicitly designed to invest in non-conventional assets, which is anything other than stocks, bonds, or cash. This could include everything from fine art to real estate to private equity. Such funds are popular diversification tools since their assets have little correlation to the market.
These are a great choice for retirees who want to diversify with alternative investments but aren’t sure where to begin, or who don’t have a preferred alternative investment asset when they get started. This allows you to get a taste of everything, with a bit of professional guidance.
Retirees should look for alternative investment funds with merger arbitrage, options strategies, and convertible bonds. These three features together give you some of the same characteristics as bonds (low stock correlation and low volatility) with the added benefit of daily liquidity. Make sure to work with an experienced and specialized mutual fund manager.
An annuity is a contract between you and an insurance company. Under the contract, you buy an annuity in a single payment or series of payments, and in exchange, the insurance company sends you guaranteed monthly checks for the rest of your life.
There are three types of annuities:
- Fixed annuity (minimum interest and fixed periodic payment amount)
- Variable annuity (annuity payments are directed to investment vehicles)
- Indexed annuity (returns are credited based on a stock market index)
These are split into immediate annuities, where the company pays right away, and deferred annuities, where you make payments to the company but it doesn’t start paying you for several years.
People typically buy annuities for guaranteed monthly income, the death benefit (if you die before receiving payments, your named beneficiary receives them), or tax-deferred growth (you don’t pay taxes on income or investment gains until you withdraw the annuity money).
Keep in mind that annuities can come with high fees and can be hard to get out of. Talk to a financial adviser to see if annuities are the right choice for you.
A lot of retirees think that stocks are off the table once they hit the golden years. That’s not actually true—you just can’t afford the kinds of risks you took 20 years ago.
Dividend stocks are companies that pay out a portion of their earnings (dividends) to shareholders on a regular basis. For retirees, the best ones are so-called dividend aristocrats, members of the S&P 500 that have raised their dividends for at least 25 consecutive years. One such example is Procter & Gamble Co., which has made uninterrupted dividend payouts for 60 years.
If you’re still leery of stock market risks, you can reduce your risk with an options strategy called covered call, which is when an investor holding a long position in an asset sells call options on the asset to generate income. The “cover” is the investor’s long position, because the buyer can deliver the shares if the buyer of the call option chooses to exercise it. Here’s a breakdown of how it works, but the gist is simple: a call is the right (not obligation) to buy or sell in a specified timeframe. This means you can sell a call option above the stock’s current price to get a premium payment.
For dividend stocks, covered calls give you the advantage of the call option premium, dividend payments, and capital appreciation, all with less risk than you would assume if you purchased dividend stocks outright.
If you’re interested in dividend stocks and covered calls, make sure to work with an investment professional. It takes some art to do this properly.
Let’s Diversify Your Portfolio
Ultimately, investment strategies for retirees are all about balance. You want to protect what you already have against market volatility, achieve enough growth to insulate against inflation, and make your money work for you throughout retirement.
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