8 Low Risk, High Return Investments for Retirees
People spend a lot of time and effort planning for their retirement. They start saving early and find the best retirement plans to ensure that they retire with a comfortable amount to fund their daily expenditure and retirement goals. It is vital to find proper investment avenues for your retirement savings to gain good returns and to keep risk factors to a minimum. If you’re an investor and are unsure of the most suitable investments for your retirement, consider consulting a financial advisor for further guidance.
According to a recent report by the Centre for Disease Control and Prevention, the life expectancy of U.S citizens at the age of 65 was 19 years. This implies that we need our retirement savings to fund around two-decades worth of expenditure. Therefore, it becomes essential to find safe investments with high returns which are best suited for senior citizens. In this article, we will explore some of the best investment options for retirement.
Listed below are low-risk high-return investment options that retirees could consider to support them financially along with their social security benefits:
1. Real Estate Investment Trusts
REITs stand for Real Estate Investment Trusts. They function like mutual funds and invest in properties/real estate. These funds invest the pooled capital of investors in carefully selected real estate categories such as hotels, residential buildings, or commercial spaces. They invest in direct equity or mortgages in the above-mentioned categories of properties.
Professional fund managers manage the investment, may undertake the development of the property, pay taxes, collect income, and distribute the same to the set of investors. REITs, by law, must distribute 90% of their income in the form of dividends to their investors. These dividends are generally higher than the returns you earn from stock dividends, and that is where the attraction for the product lies. The opportunity to develop properties and/or sell them combined with high dividend yields makes investing in REITs a sound investment decision for retirees who have a larger corpus for investment. REITs are more affordable than direct real estate investments, and moreover, one is not responsible for the management of the property.
2. Stocks that pay a dividend
Investors are known to prefer stocks that pay periodic dividends as they are a source of income stability during market uncertainties. An additional advantage that these dividend-paying stocks provide is a higher yield than some of the more low-risk investments such as Certificates of Deposits (CDs), Treasury bills, and Fixed Deposits.
Although investing in these stocks is not free from risk, they are a worthwhile investment option. Such stocks have the potential to provide you inflation-beating income with capital gains coupled with dividend payouts. Thus, they can be considered as a less risky and high return investment. Instead of just purchasing stocks, you may consider investing in dividend income funds too. Under this, a fund manager invests your money in different dividend-paying stocks.
3. Covered calls
One option to reduce the risk associated with dividend-paying stocks is to get covered calls on them. A call option gives the buyer the right but not the obligation to buy the underlying security at the expiry date. In the case of a covered call option strategy, the investor can sell or write a call option with a higher strike price than the stock’s current price. Doing so will provide you with a premium. A covered call strategy works best when the investor anticipates that the stock will not have large movements in either direction.
Writing calls on dividend-paying stocks can be beneficial as investors get a premium from selling the calls as well as capital gain and dividend income. Additionally, selling calls on dividend-paying stocks has less risk than simply buying those stocks. You may want to reach out to your financial advisor before making investments or trading with Futures and Options on the stock market.
Get in touch with a qualified financial fiduciary who may be able to provide you with suitable investment strategies that you may benefit from. Simply answer a few questions on the Paladin Registry advisor match tool and get matched with 1-3 investment advisors suited to your unique needs.
4. Preferred stocks
A preferred stock is a hybrid product of stock and bond. It provides the investor with a coupon that is greater than what government bonds pay. It also has a low degree of risk as compared to general stocks. In the event that a company goes bankrupt, paying back the capital of preferred shareholders takes priority right after bondholders. This additional risk pays off in terms of good returns to the investor, as long as the company performs well financially.
The high yield with low risk factor makes preferred stocks the ideal asset for retirees who seek passive income. You may consider adding preferred stocks to your portfolio for diversification purposes, but after assessing your unique goals and needs, time horizon, and risk appetite.
5. Annuities
Annuities are a mix of insurance and investments. They are investment contracts signed between the client and an insurance company. You give the company a lump sum amount of money, and they pay you regular interest on that sum at specified periods. There are various types of annuities, but the common characteristic is that they provide the investor with a guaranteed return that is pre-defined in the contract.
There are several options to choose from under annuities. An investor can opt for a fixed annuity, under which he will gain guaranteed returns at relatively higher interest rates. Investing your funds in a fixed annuity will provide you with excess returns than a bank’s Certificate of Deposit. You can even opt for an immediate annuity which starts paying out returns within one month. Such annuities are suited for people who are prone to overspending.
Fixed annuities are a great way to protect your capital. They guarantee the principal that you invest, a reasonable rate of interest and fixed payouts throughout the investor’s life. However, the fees and commission charged by annuities could be substantial. Many annuities also include some complicated features. Thus, you must go through the costs associated with investing in annuities and the product features appropriately. Also, make sure to be aware of how investing in the annuity will change your tax liability.
6. Cash-value life insurance
Cash-value life insurance is a portion of your savings that you can use for investing and earn interest. You can withdraw or borrow this amount in emergencies. This product offering helps in compounding tax deferrals every year. Moreover, cash value life insurance provides a good amount of dividend payout whenever the interest rates in the economy are on the rise. On the contrary, bonds are reduced in their value with high-interest rates. Hence, investing in cash life insurance is a better option compared to holding a bond. The value of these policies is guaranteed to appreciate with every passing year.
Few of these policies are capable of providing dividends equal to payouts given by mutual funds, too. In most market situations, the yield provided by the policies is well beyond the yield offered by treasury bonds. However, the catch is that the dividend payouts from cash value policies are not guaranteed as opposed to yield on government bonds. One should try and find companies that have had a good track record of paying regular dividends.
You will be required to pay fees or interest to be able to utilize your cash value in the insurance policy. In addition, be aware that the money received from this portion will not be passed on to your beneficiaries after your passing.
7. Bonds
Investing in bonds is the traditional way of growing capital in a risk-free environment. It is the simplest way to get guaranteed and regular income from your investment. Be sure to invest in bonds that score high in their credit rating to reduce your risk exposure to market uncertainties. Bonds are available for the short, medium and long-term. They have varying interest rates, some have adjustable floating rates, and others have fixed rates.
Investors may consider creating a bond ladder. Under this strategy, they purchase bonds with different time horizons, which are in sync with the various requirements of the investor, at specific periods in time. This helps them remain liquid without giving up on the opportunity for maximum wealth creation from the investment.
8. Alternative investment funds
A retiree can consider alternative investment funds, including convertible bonds, option strategies, and merger arbitrage. These modified investment products and strategies can provide the needed diversification in your portfolio, since they have the least correlation with stock movements. Another advantage is that they face lower overall volatility than stock indices. Mutual funds are liquid due to lesser volatility.
Investing in alternative investment funds can be challenging due to the complexity of those products and asset classes and the difficulty in narrowing down the one suitable for your life situations. Hence, hiring an investment manager or wealth manager is generally preferable. A financial manager is much more experienced and has specialized knowledge about the different investment options available. They can handle the funds better on your behalf. Investors should be mindful that the fees charged by these fund managers could be higher than average due to various legal research, administrative, and trading charges that these services entail.
[See: Diversifying Your Portfolio Through Alternative Investments]
The bottom line
It is recommended that retirees invest in safe investments in retirement to ensure that they are able to sustain and manage their finances over time. Retirees should choose their investments carefully after considering their daily expenditure needs, financial goals and risk tolerance. Other factors such as the costs associated with your investments, quality of fund manager, etc., are also important in investment decision-making.
Looking for suitable investment strategies for your retirement? Connect with a qualified financial fiduciary to effectively plan your investment roadmap in retirement. Use Paladin Registry’s free advisor match tool to match with qualified advisors who may be able to help you with your specific queries and create customized plans for you. Answer a few questions and get matched with 1-3 fiduciaries suited to meet your unique financial needs. You may also set up a free initial consultation with them before deciding to hire one.
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