How to Use Safe Investments for Retirement
Safe investments preserve capital, but provide less income and little growth
Want to keep your nest egg safe? Use these 6 rules to learn how to find safe investments, and see where they belong within the context of your retirement income plan.
1. See which types of investment are considered safe
No investment is completely safe, but there are 5 (bank savings, CDs, Treasury securities, money market accounts, and fixed annuities) that are considered to be among the safest investments you can own. Their primary purpose is to protect your principal. A secondary purpose is to provide interest income. You're not going to get high returns from these choices, but you won't see losses either.
2. Learn how safe your safe investments really are
All investments have risks, even “safe” ones. You are exposed to three types of risk with safe investments; the potential to lose principal, loss of purchasing power due to inflation, and the risk that comes with illiquidity, which can occur when safe investments contain surrender charges or maturity dates that are a long way off. Because of inflation, if you keep all your money in safe places, years down the road you may find it won't buy the same amount of goods and services; meaning it may not have lost principal, but if it is too safe, if may lose purchasing power. Sometimes safe investments are not quite as safe as you think they are. For the long-term, you'll also need some funds invested for growth.
3. Figure out how much of your money should be in safe investments
At a minimum, you want to keep three to six months worth of living expenses in safe investments as your emergency fund. The less secure your employment, the more money you want to keep tucked away safely. The closer you are to retirement, the more money you want to keep in low-risk investments that don't have volatility. As you near retirement, you'll want to do a retirement income projection and use it to determine how much to keep in safe investments. You can use the projection to see how much you'll need to withdraw, and when - then match up your safe investments with your cash flow needs, so safe choices are used to fund your withdrawals.
4. Develop realistic rate of return expectations
What kind of investment returns, or approximately how much investment income, would you expect to receive from safe investments? It depends on the year. For the fifteen years from 2000 - 2015, your return on safe investments ranged from a high of 6% in 2000 to a low of 0.11% in 2014. With current interest rates at historical lows, you shouldn't expect much income from safe choices. You'll need to add in other choices if you want the potential for higher returns.
5. Learn to recognize - and avoid - bad investments
One key to making safe investments is learning how to avoid bad investments. You can bypass many a bad investment by knowing what to look for. Avoiding big mistakes might be the most important factor in your retirement success. Most bad investments can be avoided by developing some common sense, and by realizing that super-sized returns without risk simply do not exist.
6. Add choices that provide guaranteed retirement income
Although not technically an investment, finding guaranteed retirement income definitely falls in the same category as safe investing. After all, how much safer can you get than "guaranteed"? Guess it all depends on where the guarantee comes from. The primary sources of guaranteed income are Social Security, pension plans, and annuities. These choices provide a great foundation to a secure retirement income plan.
Finally, safe investments have their place in your portfolio but being too safe can have a negative impact on your bottom line. The longer your money is working for you, the longer it will last in retirement. If your portfolio becomes too safe too soon, you'll miss out on potential gains that would have came with only a marginal uptick in risk. Work with a financial adviser you trust to keep an appropriate risk profile.
The Vanguard Group. "What's the Right Emergency Fund Amount?" Accessed July 2, 2020.
Federal Reserve Bank of St. Louis. "3-Month or 90-day Rates and Yields: Certificates of Deposit for the United States." Accessed July 2, 2020.
U.S. Department of the Treasury. "Daily Treasury Yield Curve Rates." Accessed July 2, 2020.