“If I was your mom, how would you invest my money?”
A lady who I had previously helped with her aunt’s investments for years now came to me regarding her upcoming retirement.
She was already working with a “broker,” as she called him but didn’t feel 100% secure about her investments and wasn’t really sure if they were long-term or short-term investments. She needed help, and I’m glad I was there!
The 2008 financial crisis rocked her, and she was seeking something much safer for retirement.
As we discussed her various options and I asked open-ended question after another, she finally asked me the question above:
If I was your mom, how would you invest my money?
How’s that for an icebreaker question!
Once you arrive at retirement, you no longer have time to wait out a major decline in the stock market.
Capital preservation and providing yourself with a regular income will suddenly be at least as important as growth.
If you are ready to invest, make sure to check out our reviews on great investment options, such as our Motif Investing Review.
For that reason, you’ll need to begin shifting your investment portfolio from equities to fixed-income assets.
Table of Contents
1. The Bank
Unfortunately, most fixed-income assets don’t pay a whole lot in the way of interest income. Actually, they don’t pay squat. But one thing you can count on with bank assets is that the principal value of your investments will be completely safe (funds on deposit are fully insured by the FDIC for up to $250,000). And they’re completely liquid – you can get your hands on your money at any time and on short notice.
There are various ways to hold your investments at the bank. There are, of course, traditional checking and savings accounts that pay little or no interest. There are also certificates of deposit that pay higher returns and lock those returns in for anywhere from six months to five years.
For complete liquidity, there are also bank money market funds. These typically don’t pay as well as certificates of deposit, but they don’t lock your money in for extended terms, either. You can usually access this money simply by writing a check or having funds transferred to another account.
You’re not limited to your local bank, either. You can often get higher rates of return through online banks. For example, you can check out this post to see which banks are offering the best rates on certificates of deposit and move your money accordingly.
2. The Government
You can directly invest in U.S. Treasury securities through Treasury Direct, the U.S. Government’s bond window. There you will find a variety of interesting fixed-income investment opportunities.
- Treasury Bills – These are short-term government securities with maturities ranging from a few days to 52 weeks. They are sold at a discount from their face value, which means that you collect your interest when the securities mature.
- Treasury Notes – These are intermediate-term securities that are issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months.
- Treasury Bonds – These are bonds that mature in 30 years and pay interest every six months. Caveat on Treasury bonds: Because of the long term, you can lose principal on the securities due to increases in interest rates; as such they are not necessarily suitable as capital preservation assets.
- Treasury Inflation-Protected Securities (TIPS) – These pay interest every six months and are issued with maturities of 5, 10, and 30 years. In addition, the principal is adjusted by changes in the Consumer Price Index, providing protection against inflation.
- I Savings Bonds – Same situation as with TIPS, in that you earn interest, while the principal value is adjusted based on changes in the Consumer Price Index.
- EE and E Savings Bonds – These are savings instruments that pay interest based on current market rates, with terms of up to 30 years. Electronic EE Savings Bonds are sold at face value in TreasuryDirect.
- I Bonds and EE/E Bonds can be purchased in denominations as low as $25 up to a maximum of $10,000 per year. All others can be purchased in denominations as low as $100 with no maximum limit.
You can invest in the securities directly with the U.S. Treasury in much the same way that you invest in an online bank. And since they are issued by the U.S. Government, there is zero risk of default.
3. Fixed Annuities
Fixed annuities are issued by insurance companies and are very similar to certificates of deposit. You invest in these securities for a specific period of time at a fixed rate of interest.
They have some liquidity and enable you to withdraw interest income periodically without paying penalties or losing your agreed-upon interest rate, but your principal is tied up for several years (usually for three to seven years).
John Wenzel, CFP® and co-founder of Archvest Wealth Advisors, offered these pros and cons of fixed annuities:
- Pros: Good for individuals who live on a fixed income and are either scared or very concerned about losses in the stock market.
- Cons: It’s oftentimes hard to understand and know the true costs of holding the annuity. Not just the annual fees but also the cost if one were to invade the principal of the annuity.
As John has pointed out, the fees are typically hard to understand. Most pure annuity salesman will boast that fixed annuities have no fees. While they don’t have any fees that you can see (perhaps a small annual fee), there’s always a cost involved.
The con that John pointed out is crucial. Fixed annuities include a surrender charge in the event that you withdraw more than a specified allowable amount or before the end of the agreed-upon term. That’s very much different than a bank CD, where you only give up your accrued interest if you decide to withdraw before the CD matures.
4. Fixed Indexed Annuities
Fixed indexed annuities, or FIAs, also referred to as hybrid annuities, are very similar to fixed-rate annuities. You make a specific investment at a certain interest rate and have similar liquidity options. However, an FIA will allow you to link your investment to stock market indexes, giving you the opportunity to earn even higher interest.
This unique feature enables you to participate in stock market index gains while protecting your investment from the losses that can typically occur with equity investments.
Most fixed indexed annuities also offer lifetime income benefit riders that will pay an investor a lifetime check either for an individual or for a spouse. This is especially attractive for a retiree who is worried that their retirement assets might be eroded due to future stock market crashes or unavoidable rising costs of living.
Chris Cousins, ChfC and principal of Wealth Architects, Inc, has this to offer on fixed indexed annuities:
Like any financial product available in the marketplace, using a product (tactic) as the solution never leads to a successful long-term plan. So, if considering the use of a fixed index annuity contract as part of an overall financial strategy – here are some pros and cons
Fixed Indexed Annuity Pros:
- Can transfer the risk of principal loss to an insurance company. We are at all-time highs in the U.S. stock market and are likely to enter a rising interest rate environment that hardly any financial advisor in the business today has experience with. Protecting capital is a high priority.
- There are many more interest crediting options today than in past products. This could potentially increase the crediting to the contract for the client under multiple scenarios.
Fixed Indexed Annuity Cons:
- Lack of flexibility due to surrender charges. These need to be minimized because a lack of flexibility causes a lack of planning strategy.
- Be cautious of contracts that allow the insurance company to change crediting parameters toward their own best interest. The participation rates and caps should be contractually fixed so that you know what you are buying from the beginning.
AssetLock™ is an investment tool to help you invest in the equity markets by helping you to respond to a drop in market performance. It is a software tool that monitors your portfolio and establishes predetermined downside points that will adjust on market trading days. This helps you to always be aware of how your portfolio is doing.
This is not a simple stop-loss strategy, either. A stop-loss involves setting certain price levels at which investment security will be sold. For example, you can set a stop loss at a point equal to 90% of the purchase price of a stock – that will trigger an automatic sale of the stock in the event that the price falls as much as 10%. That will minimize your loss of security in the event of a decline in price.
Rather than setting an automatic sale trigger price on an investment, AssetLock™ instead alerts you to various adverse market conditions, which will trigger your advisor to contact you to discuss those conditions, the impact they are having on your investments, and whether or not you should sell.
This works by using what is called an AssetLock Value. That is a predetermined price point that will trigger the initiation of certain actions. For example, when the AssetLock Value is reached, a portfolio manager from FormulaFolios will monitor the market, and if there is a recovery, no trades are placed.
If the market is not recovering, your portfolio will be moved into safe, short-term U.S. Treasury bills by the close of business, one day after reaching your AssetLock™ Value.
AssetLock won’t completely protect you from losing principal on your equity investments, but it will allow you to stay invested in stocks and minimize the worst of market declines in the process.
This can be a critical tool to have, too. Though you’ll need to gradually begin moving your money into safe, interest-bearing assets in retirement, you will still need to keep a certain percentage of your portfolio in stocks. Inflation will continue even after you retire, and stocks are the best way to protect your portfolio from it. And while that’s happening, AssetLock™ will keep you from getting clobbered by major market declines.
6. Peer-to-Peer Lending
Peer-to-peer lending is another possible way to get great returns without taking a whole lot of risk. This option can prove to be beneficial, especially in the midst of stock market downturns.
So, what exactly is peer-to-peer lending? Perhaps you’ve had a family member ask for some dough. That’s a difficult situation to be in, but what if instead of making interest off of family members (please don’t), you could make interest by investing in strangers’ pursuits? Well, now you can with peer-to-peer lending.
People visit Prosper and Lending Club to borrow money for a variety of reasons. It could be to pursue a business venture, pay off a student loan, or pay off a credit card. Companies like Prosper and Lending Club mediate between you (the investor) and the borrowers.
While I haven’t personally seen much risk associated with peer-to-peer lending, you should know that most peer-to-peer lending is unsecured. It is possible to lose your investments. That’s why I recommend you diversify your loans to decrease the volatility of your lending portfolio.
Also, I don’t view peer-to-peer lending as a replacement option for a good investment portfolio of stocks, mutual funds, and similar investments. Peer-to-peer lending is a great and relatively safe investment that can complement traditional investing.
Why would you want to include it as a part of your overall investing strategy? One word: returns. I’ve personally seen returns at Lending Club as high as 18.04% and returns at Prosper as high as 16.72%. If that doesn’t blow your socks off, I don’t know what will.
How Do You Invest Safely?
By taking a little of each of these strategies and trying them out. Diversify your portfolio and make wise choices when choosing your investments – especially when you’re in retirement and have to rely on investment income.
Happy investing! Be safe!