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As you get older, it’s generally a good idea to slowly reduce the risk in your portfolio. When you’re young, not only do you have a rising income stream from your job, you also have plenty of time to recover from any bear markets. But if you’re nearing the end of your career or maybe even retired, your income probably won’t increase and you’ll have little to no time to bounce back from any sales.
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 come with risks, here are some of the best options when looking for safe investments for seniors.
In terms of risk of capital loss, US Treasury bills are often referred to as the safest investments in the world. All Treasury bills are backed by the full trust and credit of the US government, meaning it will always pay them out, even if it has to print more money.
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Treasury securities still carry interest rate risk, which means that if you sell them before maturity, you could lose money if interest rates have risen. But that is precisely why Treasury bills are extremely safe. They are issued in very short maturities, with the longest being 52 weeks, thus minimizing interest rate risk.
Certificates of Deposit do not have the backing of the US government in the same way that Treasury bills do, but they are insured by the Federal Deposit Insurance Corporation for the sum of $250,000. However, keep in mind that this coverage limit applies to all accounts owned by an individual at the same institution. To supplement this coverage, many banks and brokers also have additional insurance. Anyway, as long as you don’t exceed the coverage limits, CDs are almost as protected from defaults as Treasuries.
High-yield savings accounts
High-yield savings accounts, especially those issued by online institutions, can often have interest rates close to or even higher than those on CDs, and they still have the same type of FDIC insurance. One advantage of savings accounts over CDs is that they don’t have early withdrawal penalties like most CDs. Before the coronavirus pandemic, savings account withdrawals were limited to six per month, but currently savings account withdrawals are unlimited.
Treasury inflation-protected securities, also known as TIPS, are another form of safe security backed by the full trust and credit of the US government. TIPS has the added assurance that they can adjust their payments based on inflation. Given the current inflation in America, which is the highest in more than 40 years, TIPS seems particularly suitable for seniors who are safety-oriented.
TIPS adjust their principal every six months based on inflation, while the interest rate remains fixed. However, as interest is paid on principal, payments also increase in an inflationary environment.
Fixed annuities have a 10% penalty for withdrawals before age 59½ so these investments alone are more appropriate for seniors. They are guaranteed by the insurance company that issues them, so they generally have a relatively high level of security.
However, you’ll want to review the financial status of any company you buy an annuity from before owning it. Fixed annuities typically pay interest until you die, regardless of how long you live, so they can help retirees survive their income. Typically, beneficiaries receive the amount the annuity owner originally paid for it, less any payments already received. Others may charge additional death benefits to beneficiaries, although they may cost more at the time of purchase.
Money Market Accounts
A money market account is a kind of hybrid between a savings account and a checking account. Typically, money market accounts pay interest rates that are close to savings accounts, but they also offer more access in the form of checks and sometimes ATMs/debit cards.
Money market accounts are becoming less popular thanks to the rise of free checking accounts and high-yield savings accounts, but there’s still plenty to choose from. From a security perspective, money market accounts are also considered deposit accounts, meaning they have the same $250,000 FDIC insurance as CDs and savings accounts. However, most money market accounts have higher minimums than other types of accounts.
High Dividend Stocks
The investment world is filled with different types of risks. Treasuries, CDs and most other conservative investments are often considered “safe” because they have little to no market risk. In other words, they are generally not traded in value.
However, all these types of investments come with purchasing power risk, which is the danger that your money will be worth less in the future due to inflation. This is where a diversified portfolio of high-dividend stocks can help. Stocks in general help reduce inflation risk by growing the value of your investments over time, but dividend-paying stocks have the added benefit of increasing income streams. This is because most high-dividend stocks have reliable cash flows that increase along with earnings each year. These types of stocks are also generally less volatile than high-growth stocks, which can help reduce 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 runs into financial difficulties, it has to pay off its preferred stockholders before the common stockholders receive anything.
In that sense, preferred stocks are somewhat like bonds, although they often have very long maturities or no maturities at all. This makes preferred shares sensitive to interest rate risk. However, they often pay out relatively high income and carry much less market risk than common stocks.
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