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As you get older, it’s generally a good idea to start slowly reducing the risk in your portfolio. When you’re young, not only do you have a growing stream of income coming from your job, you have plenty of time to recover from any bear markets. But, if you’re at the end of your career or maybe even retired, your income probably won’t grow anymore and you’ll have little to no time to recover from any discounts.
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This is why seniors should generally have a significant portion of their portfolios in safer investments. But what exactly qualifies as a “safe” investment? While all investments involve risk, here are some better options when looking for safe investments for seniors.
In terms of risk of capital loss, US Treasuries are often cited as the safest investments in the world. All Treasury bills are backed by the full faith and credit of the US government, meaning it will always pay them back, even if it needs to print more money.
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Treasuries still carry interest rate risk, meaning that if you sell them before maturity you could lose money if interest rates rise. But this is why Treasuries in particular are extremely safe. They are issued at very short maturities, with the longest being 52 weeks, so interest rate risk is minimised.
Certificates of deposit
Certificates of deposit are not backed by the US government in the same way as Treasury securities, but are insured by the Federal Deposit Insurance Corporation to the tune of $250,000. Note, however, that this coverage limit applies to all accounts owned by an individual at the same institution. To supplement this coverage, many banks and brokerage firms also carry supplemental insurance. Either way, as long as you don’t exceed coverage limits, CDs are almost as protected from default as Treasuries.
High yield savings accounts
High-yield savings accounts, especially those issued by online institutions, can often carry interest rates close to or even higher than what you’ll find with CDs, and still carry the same type of FDIC insurance. One advantage savings accounts have over CDs is that they don’t have early withdrawal penalties like most CDs do. Before the coronavirus pandemic, withdrawals from savings accounts were limited to six per month, but currently savings withdrawals are unlimited.
Inflation-protected Treasury securities, also known as TIPS, are another form of safe security backed by the full faith and credit of the US government. TIPS have the added security of having their payments adjusted based on the rate of inflation. Given the current state of inflation in America, which is at its highest level in 40 years, TIPS seem particularly suitable for security-minded seniors.
TIPS adjust their principal based on the rate of inflation every six months, while the interest rate remains fixed. However, as interest is paid on principal, payments also increase in an inflationary environment.
Fixed annuities carry 10% penalties for withdrawals before age 59 ½, making them the most suitable investments for seniors. They are guaranteed by the insurance company that issues them, so they generally provide a relatively high level of security.
However, you’ll want to check the financial standing of any company you buy an annuity from before you own it. Fixed annuities usually pay interest until you die, no matter how long you might live, so they can help retirees outlive their income. Typically, beneficiaries receive the amount the annuity owner originally paid for it, less any payments they have already received. Others may have additional death benefits paid to beneficiaries, although they may cost more at the time of purchase.
Money market accounts
A money market account is something of a hybrid between a savings account and a checking account. Typically, money market accounts pay interest rates close to savings accounts, but also offer greater access in the form of checks and sometimes ATM/debit cards.
Money market accounts are declining in popularity thanks to the rise of free checking accounts and high-yield savings accounts, but there are still plenty to choose from. From a security standpoint, money market accounts are also considered deposit accounts, meaning they carry the same $250,000 FDIC insurance as CDs and savings accounts. However, most money market accounts carry higher minimums than other account types.
High dividend stocks
The world of investing is filled with different types of risk. Bonds, CDs, and most other conservative investments are often considered “safe” because they have little to no market risk. In other words, they generally do not decline in value.
However, all of these types of investments carry purchasing power risk, which is the risk that your money won’t be worth as much in the future thanks to inflation. This is where a diversified portfolio of high dividend stocks can help. Stocks generally help mitigate inflation risk by providing growth in the value of your investments over time, but dividend-paying stocks have the added benefit of a growing income stream. That’s because most high-dividend stocks have reliable cash flows that grow every year along with earnings. These types of stocks are also generally less volatile than high-growth stocks, which can help mitigate their inherent market risk.
For seniors, preferred stock is often a better choice than common stock. This is because preferred stock pays a much higher dividend than common stock, and that dividend ranks higher in a company’s capital structure. This means that if a company is in financial trouble, it must pay off its preferred shareholders before the common shareholders get anything.
In this sense, preferred stocks are somewhat similar to bonds, although they often carry very long maturity dates or even none at all. This makes preferred stock susceptible to interest rate risk. However, they often yield relatively high income and carry much less market risk than common stocks.
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