Retirees often find themselves in financial setbacks. Even after having made enough investments in various retirement savings instruments, their nest eggs could be in danger of running out. With people living longer and concerns such as inflation, rising interest rates and high taxes, the elderly are faced with a unique financial situation.
To combat this, here are a few less-risky investment options that individuals can choose from to ensure a steady source of income. However, any investment decision must be made with thorough understanding of the financial product, taking costs into consideration.
Investing in dividend-paying stocks is a great way to insure oneself from inflation. These stocks provide a stable dividend income regardless of overall performance or even market downturns. Individuals should look for stocks that have a consistent track of raising dividends and a dividend yield of at least 4%. Some prominent names that arise here are AMC Entertainment Holdings (AMC - Free Report) , Apollo Global Management (APO - Free Report) and Aircastle Limited (AYR - Free Report) , companies with current dividend yields of 5.7%, 7% and 6.1%, respectively.
Mutual Funds & ETFs
Those who are skeptical about buying stocks can try their hand at purchasing mutual funds or exchange traded funds (ETFs), comprising dividend-paying stocks and other securities. With a diverse portfolio of stocks, bonds and several other assets, these could prove less risky than stocks.
One of the most revered investors of all time, Warren Buffett, suggests investing in low-cost S&P 500 index funds as part of retirement planning. “Consistently buy an S&P 500 low-cost index fund,” he told CNBC’s On The Money. “I think it’s the thing that makes the most sense practically all of the time.”
Index funds mostly attract investors’ attention because of their low fee. These are passively managed funds that aim at matching the performance of the financial index. So, an S&P 500 index fund will try to match the performance of the Standard & Poor’s 500. Essentially, Buffett endorses investing in the Vanguard 500 Index Fund (VFINX - Free Report) .
Real Estate Investment Trusts (REITs)
REITs are an investment vehicle allowing purchase of shares in commercial real estate portfolios such as apartment buildings, office buildings or hotels. These funds provide a substantial amount of portfolio diversification, as a single portfolio may consist of shares of a wide variety of properties.
REITs mostly lease property for a certain income and are liable to pay 90% of the taxable income to their shareholders in the form of dividends. Thus, a steady source of cash flow is ensured. REITs are believed to have historically provided protection against inflation, besides being a good source of liquidity.
Bonds are fixed income instruments, representing a loan that individuals give to governments or corporations. They pay regular interest and when matured, the face value is returned to the owner of the bond. Among several types of bonds, U.S. Treasury bonds are especially considered as safe retirement investments since they guarantee a certain rate of return. Moreover, with government backing on the principal invested, you need not worry about losing money. Treasury bonds pay interest semi-annually and are exempted from state or local income tax.
An immediate annuity is an insurance contract that offers a guaranteed monthly income for a life time in exchange for a lump sum payment. Investors usually start receiving income a month after the premium is paid. The only downside of this kind of an investment is that payments cease entirely upon death of the insurance holder. However, with an additional cost, one can get insured against such contingencies. Some forms of annuities also offer a hedge against inflation.
Treasury Inflation-Protected Securities (TIPS)
As the name suggests, TIPS offer protection from inflation. With government backing, these securities are another form of low-risk investments. Their par value rises with inflation, measured by the Consumer Price Index (CPI). Interest on these investments are received semi-annually and the interest rate remains fixed.
TIPS can be purchased for as low as $100 with maturities of five, 10 and 30 years. These securities also offer exemption from state and local income taxes. One disadvantage of this investment is that the principal amount is adjusted downward during times of deflation. So, individuals will receive a lower interest payment.
No single investment plan can suit the needs of all individuals. Your investment decision will solely depend on your specific financial needs. For instance, if you are looking for a reduction in your tax level, you could perhaps purchase government securities since they offer exemption from state and local income taxes. Meanwhile, those who are looking for a higher stream of income could go for mutual funds and ETFs or dividend-paying stocks. As a rule of thumb, it is important to have a well-diversified portfolio consisting of some government securities, stocks, bonds and the like to sustain volatile market conditions.
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