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As you get older, it’s generally a good idea to start slowly reducing the risk in your portfolio. When you are young, not only do you have a growing stream of income from your work, but you have plenty of time to recover from any bear market. But, if you’re at the end of your career or maybe even retired, your income probably won’t increase anymore and you’ll have little or no time to bounce back from a sale.
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This is why older people should generally hold a significant portion of their portfolio in safer investments. But what exactly qualifies as a “safe” investment? While all investments carry risk, here are some better options when looking for safe investments for seniors.
Goods of treasure
In terms of risk of capital loss, US Treasury bonds 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, which means it will always pay them back, even if it has to print more money.
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Treasury securities always carry interest rate risk, which means that if you sell them before maturity, you risk losing money if interest rates have risen. But that’s why treasury bonds in particular are extremely safe. They are issued on very short maturities, the longest being 52 weeks, so that interest rate risk is minimised.
Certificates of deposit
Certificates of deposit do not have US government backing in the same way as Treasury securities, but they are insured by the Federal Deposit Insurance Corporation up to $250,000. Note, however, that this coverage limit applies to all accounts held by an individual at the same institution. To supplement this coverage, many banks and brokerages also offer supplemental insurance. Either way, as long as you don’t exceed the coverage limits, CDs are almost as protected against default as Treasury bills.
High Yield Savings Accounts
High-yield savings accounts, especially those issued by online institutions, can often carry interest rates close to or even higher than those you’ll find with CDs, and they still carry the same type of insurance. FDIC. One of the advantages of savings accounts over CDs is that they have no penalties for early withdrawal, unlike most CDs. Before the coronavirus pandemic, withdrawals from savings accounts were limited to six per month, but currently withdrawals from savings accounts are unlimited.
Treasury Inflation-Protected Securities, also known as TIPS, are another form of safe security backed by the full trust and credit of the US government. TIPS have the added security of adjusting their payments to the rate of inflation. Given the current state of inflation in America, which is at its highest in over 40 years, TIPS seem particularly appropriate for security-conscious seniors.
TIPS adjust their capital based on the rate of inflation every six months while the interest rate remains fixed. However, as the interest rate is paid on the principal amount, the payments also increase in an inflationary environment.
Fixed annuities carry 10% penalties for withdrawals before age 59.5, making these investments more suitable for seniors. They are guaranteed by the insurance company that issues them, which generally gives them a relatively high level of security.
However, you will want to check the financial status of any company you are buying an annuity from before owning it. Fixed annuities generally pay interest until you die, regardless of your lifespan, so they can help retirees outlive their income. Typically, beneficiaries receive the amount the annuity owner originally paid, less any payments already received. Others may have additional death benefits paid to beneficiaries, although they may cost more at the time of purchase.
Money market accounts
A money market account is a kind of hybrid between a savings account and a checking account. Typically, money market accounts pay interest rates close to savings accounts, but they also offer more access in the form of checks and sometimes debit/ATM cards.
Money market accounts are becoming less popular thanks to the rise of free checking accounts and high-yield savings accounts, but there’s still plenty to choose from. From a security perspective, 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 have higher minimums than other account types.
High Dividend Stocks
The investment world is filled with different types of risk. Treasuries, CDs, and most other conservative investments are often considered “safe” because they pose little or no market risk. In other words, they usually don’t drop in value.
However, all of these types of investments carry purchasing power risk, which is the risk that your money will not be worth as much in the future due to inflation. This is where a diversified portfolio of high-dividend stocks can help. Stocks in general help mitigate inflation risk by ensuring the value of your investments grows over time, but stocks that pay dividends have the added benefit of a growing stream of income. This is because most high-dividend stocks have reliable cash flows that grow each year with earnings. These types of stocks are also generally less volatile than high-growth stocks, which can help mitigate their inherent market risk.
For seniors, preferred stock is often a better choice than common stock. This is because preferred stocks pay a much higher dividend than common stock, and that dividend ranks higher in a company’s capital structure. This means that if a company encounters financial difficulties, it must reimburse its preferred shareholders before ordinary shareholders receive anything.
In this sense, preferred stocks are somewhat akin to bonds, although they often have very long maturity dates, or none at all. This makes preferred stocks susceptible to interest rate risk. However, they often pay relatively high returns and carry far less market risk than common stocks.
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