You finally have the privilege of being called a senior. You made it to retirement. But while you’re slowing down, that doesn’t mean there’s no work to do. For one thing, managing your investment portfolio doesn’t stop when your 9-5 schedule does.
In fact, it’s important to change strategies as you enter the senior phase of your life. Because you’re no longer working, if you previously were a risky investor, you may want to consider playing it a bit safer. Luckily, there's a range of investment options that can give you a comfortable mix of risk and reward. Below are six investments that can do just that.
Real Estate Investment Trusts (REITs)
If you’re looking for a way to invest in income-producing real estate, consider REITs. A REIT owns and typically operates office buildings, shopping malls, apartments, hotels, warehouses and mortgages and loans. You’ll get a share of the income produced through commercial real estate ownership without having to buy the actual properties.
What are the upsides with REITs? You get real estate in your portfolio and add diversity, which is especially important as you age. When one area of your investments takes a hit, the others help balance out the blow.
There are also some risks. For one thing, understand whether the REIT is publicly traded or not. REITs that don’t trade on a stock exchange are illiquid, meaning, they generally can’t be sold on the open market. Translation: if you need to sell this type of REIT to raise money quickly, you may not be able to do so. Stick with publicly-traded REITs.
Be mindful of tax considerations. Most REITS payout at least 100% of their taxable income to their shareholders. As a shareholder, you’re responsible for paying taxes on the dividends and any capital gains you receive. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends. Taxes can be confusing and at this life stage, you can't afford a mistake. Talk to your financial advisor before investing in REITs.
When you’re a senior, you need the stability of income, be it social security or other money—dividend stocks can help provide you with just that. With dividend stocks, companies distribute a portion of their profits to stockholders, typically on a quarterly basis. Better still, if the stock rises, you’ll get the additional benefits from that growth. Dividend companies tend to be tried and true performers, stable and ideal for seniors who don’t want to take a lot of risk.
There are plenty of good reasons to invest in dividend stocks—but they're not without drawbacks. The main drawback: your dividend payments will be effectively subjected to double taxation. Even before you get your dividends, the company issuing them from its net income has to pay tax on its annual earnings, and it’s those earnings that generate the company’s dividends that you depend on. Taxes come into play again when you have to pay income taxes on them. But, that may be a small price to pay for the peace of mind you get from knowing there’s income you can count on.
You’ve likely heard about annuities, but they may be a bit mysterious to you. An annuity is a contract between yourself and an insurance company. An insurance company makes a series of income payments for a specified time period in return for a premium or premiums you paid. The best thing about an annuity? You can’t outlive your money. That’s music to any senior’s ears.
An annuity can be a smart way to diversify your portfolio. Annuities have much appeal, but they can be complex. Other than the monthly income, withdrawals are not allowed from the annuity. The monthly payment is fixed so inflation could erode your purchasing power. The security of your income is only as good as the insurance company that issues it. Know too, that depending on the duration of your annuity, there could be a steep surrender charge if you want to exit your contract.
If safety is your goal, go with Treasury securities. You can take comfort in knowing your investment is backed by the U.S. government. Not only can you depend on getting your money, Treasuries can easily be sold for cash, which is critical when you’re on a fixed income and can find yourself in a pinch for any number of reasons.
The Treasury sells several types of investments: bills, notes, TIPS and bonds. Treasury bills (or T-bills) are short-term securities that mature in one year or less from their issue date. T-bills are purchased for a price less than or equal to their par (face) value, and when they mature, Treasury pays their par value. The interest is the difference between the purchase price of the security and what is paid at maturity (or what it sells for if it is sold before it matures). For example, if you bought a $10,000, 26-week Treasury bill for $9,750 and held it until maturity, the interest would be $250.
Treasury notes and bonds are securities that pay a fixed rate of interest every six months until the security matures, which is when Treasury pays the par value. The only difference between them is their length until maturity. Treasury notes mature in more than a year, but not more than 10 years from their issue date. Bonds mature in more than 10 years from their issue date.
Treasury Inflation-Protected Securities (TIPS) pay interest every six months and the principal value of TIPS is adjusted to reflect inflation or deflation as measured by the Consumer Price Index-the Bureau of Labor Statistics' Consumer Price Index for All Urban Consumers (CPI-U). With TIPS, the semi-annual interest payments and maturity payment are calculated based on the inflation-adjusted principal value of the security.
What’s the downside of Treasury securities? Well, you know what they say, “low risk, low reward"—that’s true with Treasuries. Don’t expect high returns. Know too, like other fixed-income investments, if interest rates go up, Treasury prices will go down, and in general, the longer the maturity of the Treasury security, the greater the drop will be. That means that Treasury bonds have the greatest interest rate risk, with notes having somewhat less and bills have little or no exposure. Remember, there is no such thing as a perfect investment.
As a senior, you want to stash a portion of your cash outside of the volatile stock market. Put certificates of deposits (CDs) on your list of options. They offer a fixed return for a specific period and are FDIC-insured, meaning they carry the guarantee of the federal government for up to $250,000.
The good news doesn’t stop there. They may also build savings at a higher rate than if you kept money in a basic savings account.
Keep in mind though, that unlike a savings account or money market, where federal law allows you to make up to six withdrawals per month without any penalty, CD’s are meant to hold your money for the entire term. This could prove problematic if you have an emergency. You may face a penalty for taking the money from your CD prior to maturity date, so consider your liquidity needs. Another consideration is inflation. If inflation rises rapidly or it outpaces the rate at which your interest rates increase, CD’s may not be able to keep up because the interest you are earning in the CD may not be enough to counter the inflation.
Also, understand that that the $250,000 FDIC deposit limit applies by title and ownership at each institution not deposit, so if you have two separate $250,000 CDs with a single institution with the same title or ownership structure, only half of your total deposits would end up being insured.
Money Market Accounts
A money market account, also known as a money market deposit account (MMDA), is an interest-bearing account that provides a higher interest rate than a traditional savings account. Another perk is that typically the account includes the ability to write checks and a debit card. You’ll have easy access to your money.
However, there are limitations with money market accounts. For example, you will be limited to the number of transactions you can make each month. Most accounts have a limit of six transfers and electronic payments. However, you can make unlimited deposits and unlimited transfers in person, by mail, messenger, or ATM. Exceeding the limit comes with a price tag. You can be fined, penalized or have your account converted to a checking account. Leave the money alone if you can and take advantage of the higher interest rates.
Retirement is full of rest and relaxation, but it’s also about continuing to manage your portfolio and investing safely. These options will allow you to continue to enjoy your retirement while not worrying about your financial situation.