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As you get older, it’s usually a good idea to start slowly reducing the risk in your portfolio. When you’re young, you not only have an increased income stream from your job, but you also have plenty of time to recover from any bear markets. However, if you are at the end of your career or even retiring, your income will likely not increase and you will have little or no time to bounce back from any sales.
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For this reason, seniors should generally keep a significant portion of their portfolio in safer investments. But what exactly qualifies as a “safe” investment? While all investments carry risks, here are some of the best options when looking for safe investments for seniors.
In terms of capital loss risk, US Treasury bills are often referred to as the safest investments in the world. All Treasury securities are backed by the full faith and credit of the US government, meaning that even if it has to print more money, it will always pay them off.
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Treasury securities still carry interest rate risk, so if you sell them before maturity, you could lose money if interest rates rise. For this reason, however, Treasury bills in particular are extremely safe. The interest rate risk is minimized by issuing them in very short terms, with the longest maturity of 52 weeks.
Certificates of deposit do not carry the backing of the US government like Treasury securities, but are insured for $250,000 by the Federal Deposit Insurance Corporation. However, keep in mind that this margin limit applies to all accounts held by an individual at the same institution. To support this coverage, many banks and brokerages also carry additional insurance. Either way, CDs are protected by default as long as Treasures, as long as you don’t exceed coverage limits.
High Yield Savings Accounts
High-yield savings accounts, especially those issued by online institutions, can often carry interest rates close to or even exceed the ones you’ll find on CDs, and they still carry the same type of FDIC insurance. One advantage of savings accounts over CDs is that they don’t have any penalties for early withdrawal as with 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 secure security backed by the full faith and credit of the U.S. government. TIPS have the added security of adjusting their payments according to the inflation rate. Given the current state of inflation in America, which has been at its highest in over 40 years, TIPS seems particularly appropriate for security-focused seniors.
Tips adjust their principal every six months based on the rate of inflation while the interest rate remains constant. However, payments also increase in an inflationary environment as the interest rate is paid on the principal.
Fixed annuities impose a 10% penalty for withdrawals made before age 59½, so this alone makes these investments more affordable for seniors. They are guaranteed by the insurance company that issued them, so it usually gives them a relatively high level of security.
That said, you’ll want to check the finances of any company you’re purchasing an annuity from before owning it. Fixed annuities usually pay interest until you die, no matter how long you live, so they can help retirees outlive their income. Typically, beneficiaries receive the amount originally paid by the annuity holder, less any payments already received. Others may have additional death benefits paid to beneficiaries, though they may cost more at the time of purchase.
Money Market Accounts
A money market account is a hybrid between a savings account and a checking account. Typically, money market accounts pay interest rates close to those of savings accounts, but also offer greater access in the form of checks and sometimes ATM/debit cards.
Money market accounts are declining in popularity thanks to the rise of free checking accounts and high-yield savings accounts, but there’s still plenty to choose from. For security reasons, money market accounts are also considered deposit accounts, meaning they carry the same $250,000 FDIC insurance as CDs and savings accounts. However, most money market accounts carry higher minimums than other account types.
High Dividend Stocks
The investment world is full of different types of risks. Treasuries, CDs, and most other conservative investments are generally considered “safe” because they have little or no market risk. In other words, they don’t usually trade for value.
However, all such investments carry the risk of purchasing power, which is the danger of not losing the value of your money in the future due to inflation. This is where a diversified portfolio of high dividend stocks can help. Stocks generally help reduce the risk of inflation by allowing the value of your investments to grow over time, but dividend-paying stocks have the advantage of an increased income stream. This is because most high dividend stocks have reliable cash flows that increase each year with earnings. These types of stocks are also generally less volatile than high-growth stocks, which can help reduce inherent market risk.
Preferred stocks for seniors are often a better choice than common stocks. 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 is in financial difficulty, it must pay its preferred shareholders before the common shareholders receive anything.
In this sense, preferred stocks are somewhat similar to bonds, although they often have very long or even no maturity dates. This makes preferred stocks susceptible to interest rate risk. However, they generally pay relatively high income and carry much less market risk than common stocks.
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