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 six rules to learn how to find safe investments for seniors and see where they belong within the context of your retirement income plan.
1. Learn About Safe Investments
No investment is completely safe, but there are five (bank savings accounts, CDs, Treasury securities, money market accounts, and fixed annuities) that are considered to be among the safest investments you can own. Bank savings accounts and CDs are typically FDIC insured. Treasury securities are government-backed notes. Money market accounts are considered very low risk, and fixed annuities typically have guarantees written into their contracts. Annuities are also insurance contracts and have some protections in place if the insurance company fails.
The primary purpose of these vehicles 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 What Safe Means
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 because the money hasn't accumulated interest and kept up with inflation. It may not have lost principal, but it may lose purchasing power if it is too safe. For the long-term, you'll also need some funds invested for growth.
3. Determine How Much to Keep in Safe Investments
At a minimum, you want to keep three to six months 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, make a retirement income projection and use it to determine how much to keep in safe investments. A financial advisor can help you develop a projection and you can use it to see how much you'll need to withdraw and when. Then you can 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, should you expect to receive from safe investments? It depends on the year. For the fifteen years from 2000 to 2015, your return on safe investments ranged would have ranged from a high of 6% in 2000 to a low of 0.11% in 2014. With current interest rates at historic lows, you shouldn't expect much income from safe choices. You'll need to add in other options 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.
For example, avoid investments with steep surrender charges and high fees. Research any potential investments and avoid anything that promises a quick, overnight return. Avoid investments that seem confusing; if no one can clearly explain the investment, it's not worth the risk. Avoiding mistakes might be the most important factor in your retirement success.
Most bad investments can be avoided by realizing that super-sized returns without risk simply do not exist.
6. Add Options that Provide Guaranteed Retirement Income
Although not technically investments, finding guaranteed retirement income definitely falls in the same category as safe investing. After all, how much safer can you get than guaranteed? The primary sources of guaranteed income are Social Security, pension plans, and annuities. These choices provide a great foundation for a secure retirement income plan.
Safe investments have their place in your portfolio, but being too safe can hurt 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 come with only a marginal uptick in risk. Work with a financial adviser you trust to keep an appropriate risk profile.
Federal Reserve Bank of St. Louis. "3-Month or 90-day Rates and Yields: Certificates of Deposit for the United States." Accessed Nov. 2, 2020.
U.S. Department of the Treasury. "Daily Treasury Yield Curve Rates." Accessed Nov. 2, 2020.