Where To Put Money After Retirement

The Importance of Diversifying Your Portfolio in Retirement

Diversification helps combat risk that is inherent in the broader financial system. When you focus only on narrow segments of a market, region, sector, asset or class, you can take on what is referred to as unsystematic risk. This type of risk can be avoided through a broadly diversified portfolio. Examples of unsystematic risk are interest rate risk, concentration risk, exchange rate risk and many others.

Diversification, which is when you spread your investments out among many different assets, regions, countries and sectors, limits these unsystematic risks by ideally placing your money in enough places where you have opportunity to participate in growth from some part of your portfolio at all times. There are times when all investments appear to rise or fall together, and there are periods where certain investments rise while others fall.

As terrible as 2022 was for investors, those who were concentrated deeply in technology (which was the darling sector in 2020 and 2021), were hurt the most. Energy investments were the star in 2022. But who knows what will be the best investment each year, and how can you pick it?

The short answer is you can’t. You don’t know which investments may break out, but when you spread your money out, you can participate in all sectors and markets to make the most of all investment options.

Owning investments that have low correlations to one another will mean that your portfolio will include a balance of assets that will move independently of one another and leave you with a more moderate but consistent return over the long term.

When structuring an investment portfolio, it is vital to do so in a way that aligns with your tolerance for risk, which is shaped by your both your willingness and your ability to assume risk. You may be eager to take on elevated levels of risk, but your investing time horizon and financial flexibility may prohibit you.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Professional

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

Which Investments Are Safest?

To peg an investment as “safe,” the investment should provide a clear, consistent return with little to no risk of loss on your original principal. However, it is important to remember that perceived safety does not always mean that an investment is risk-free. All investments contain risks, even those with guarantees. Understanding those risks and tradeoffs will be important in choosing the right investments for you.

Ultimately, your comfort level with not only risk, but certain types of risk, will be a sizeable factor in how you should invest your money. For individuals in retirement or nearing retirement, reducing your tolerance for risk, and adjusting your portfolio accordingly, is natural and beneficial because you will often be depending on your investments to support your lifestyle.

Factors To Consider

When exploring your investment options in retirement, there are many factors to consider, but few people share the exact same mix of priorities. So, when determining how to balance your investments, consider how you might order the following themes by importance: growth, protection, volatility, liquidity and tax liability.

When considering investments, there are always tradeoffs. High-growth investments rarely have low volatility, but may often be liquid (quickly sellable). Guaranteed investments from banks or insurers offer high levels of protection, but they are rarely sellable for their full value prior to maturity. For instance, selling a CD prior to maturity may incur penalties or require you to sell it for less than the face value.

Ranking your priorities is the first step to creating your ideal portfolio.

How Risk Can Vary

Many people’s personal risk tolerances are shaped by their life experiences or the experiences of those closest to them. The environment or culture someone grew up in, and the lessons they learned about money from their parents, can predict a lot about how people view money and investing. While not all lessons are good or bad, designing an optimized strategy for yourself can require careful consideration of your own preferences, biases and circumstances.

Accepting your risk tolerance and molding a portfolio around that will always yield better results than the alternative. When people outpace their risk tolerance, they may find themselves panicking (and selling) when those risks materialize.

A financial advisor can build and shape a plan that works for you personally and allow you to meet your needs.

Fixed Annuities

Fixed annuities offer retirees a guaranteed rate of return on their money. These policies can either create an immediate income stream to help retirees replace their income after leaving their careers or provide income payments later.

Annuities are guaranteed by the financial stability of the issuing insurance company, so it is essential to compare companies and review their financial health. Unlike the FDIC insurance on a bank account or CD, only the provider is standing behind the financial reserves of an annuity.

Both immediate and deferred annuities can be funded in two ways: with a single lump sum or as an accumulation of contributions over time. Determining which type to buy is most often dictated by your timeframe until retirement, with most soon-to-be retirees needing to line up income now versus waiting for it later. In either option, annuities can offer beneficial rewards.

Benefits of Fixed Annuities

Deferred Annuities

This type of fixed annuity often offers rates of return that exceed those of bank CDs or most investment-grade bonds. Additionally, the income earned is tax deferred until it is withdrawn — something CDs and bonds cannot offer.

Immediate Income Annuities

This type converts your lump sum of cash into a guaranteed income stream for the rest of your life or you and your spouse’s life. Many companies offer riders to provide additional income guarantees. Creating an income stream through an annuity is similar to creating a private pension. Income annuities are best for retirees who expect to live a long life and don’t want to risk running out of money or are uncomfortable with investing in the stock or bond market.

Certificates of Deposit

Certificates of Deposit (or CDs) are FDIC insured and issued by banks. They are not only convenient to purchase but are one of the safest, most common savings strategies due to their explicit guarantee by the government. CDs come in various maturity lengths to suit different consumers’ needs.

For retirees who want to keep money safe while investing in the short or medium term, CDs can be a good option. Strategies such as CD ladders, which means purchasing multiple CDs of varying maturities, can offer investors a higher average rate of return than just buying short-term CDs, while also keeping some of their money more liquid as each CD matures.

Retirees could consider CDs as an alternative to using bonds in their portfolios. It is important to recognize that CDs may have penalties for early withdrawal, and rates in the future may be different from rates today. Individuals who invest in CDs should maintain a separate cash emergency fund to avoid triggering early withdrawal penalties on their CDs when they need an infusion of cash.

Bonds

Bonds, otherwise know as fixed income, offer investors the opportunity to lend money to governments, municipalities or corporations with the expectation of getting interest payments over the course of the loan, with their initial investment principal returned at maturity.

The most common ways to buy bonds are either directly or through pooled funds like mutual funds or ETFs. Buying a bond directly means if you hold the bond to maturity (and the institution does not default) you will get your expected payments and principal.

However, selling your bond early will mean the value of the bond will be tied to the prevailing interest rates and may be higher or lower than when you purchased it. Buying a bond fund (either a mutual fund or ETF) has the lowest barrier to entry for most investors but the value of the fund will be susceptible to interest rate changes and the whims of other fund investors. Unlike owning a bond directly, there are no set maturities for bond funds.

One of the most popular strategies for investing is the 60/40 portfolio, meaning 60% of your investment portfolio is stock and 40% is bonds. For decades, this was considered an “all-weather” portfolio, but during the recent years of zero interest rate policy, bonds have fallen out of favor due to their very low yield.

How you own your bonds and what bonds you own will greatly impact your experience of using bonds as a safety net. Working with an experienced advisor who understands how to balance your income needs with your risk tolerance will place you on a strong foundation in retirement.

High-Yield Savings Accounts

High-yield savings accounts (HYSAs) typically offer over 12 times higher interest rates on your money in comparison to more traditional savings accounts.

These accounts are best used for maintaining a cash emergency fund that isn’t needed day to day but will be accessible within a few business days if needed. Most retirees need to keep a higher cash balance than the average person because their income is so dependent on either fixed sources or their investments.

A common guideline is to hold 12 months of essential living expenses in cash or cash equivalents. Your specific situation may differ, and you can get a more personalized suggestion from a licensed financial advisor who can analyze your cash flow needs.

High-yield savings accounts offer FDIC insurance just like all other bank accounts but may have certain stipulations to access their highest advertised rate. Check with the bank on what requirements they have before depositing.

Money Market Accounts

Money market accounts are like savings accounts in many ways but differ in a few keys areas that may impact retirees’ choice of where to place their money. While money market deposit accounts offer FDIC insurance, money market mutual funds do not. Deposit accounts will be offered by banks, while mutual funds will be offered by brokers and other entities that are not banks or credit unions.

Money market deposit accounts often have a higher minimum required balance than their savings account counterparts, but they also will likely offer a higher interest rate. Money markets will also typically offer check writing while savings accounts will not. Check with your bank or credit union about the requirements and options available before making a deposit.

Where Not To Put Your Money in Retirement

The danger of avoiding risk altogether is just as bad as taking on too much risk. For example, parking your money in all stocks may leave you at risk of losing a significant amount in a single year, but this a risk that is plain to see. Alternatively, placing your money solely in cash or savings accounts, while not as volatile, guarantees you to lose money over time due to the insidious march of inflation.

Retirees must remember to be balanced in all things. Over the course of a long retirement, deploying your money into cash, savings accounts, CDs, bonds, stocks, annuities and other investments appropriately can provide a well-balanced and flexible retirement. When times are good, your long-term investments like stocks will shine and pad your portfolio through proper rebalancing. When times are bad, your safe and guaranteed investments will give you the piece of mind and income support you need.

Signs of a Bad Investment

Even the best investment products can become bad investments when used inappropriately or at the wrong time. However, there are several investment types that most investors and especially retirees should stay away from because they are unlikely to provide the necessary income or flexibility they require. When it comes to choosing investments, it is essential to do so within the context of a financial plan to ensure your investments are aligned with your risk tolerance and meet your income needs.

Poor Investments Options for Retirees

Collectibles

Collecting can be a fun hobby but rarely do collectors make a lot of money on their property. The rare exceptions make the news, but your childhood baseball cards or action figure collection isn’t likely to be able to fund your retirement. Like many items on this list, the lack of liquidity will be a huge impediment to using these for income.

Private REITs

REITs, or Real Estate Investment Trusts, are common pooled investment funds to invest in commercial or residential real estate. There are both public and private versions, but the downside of the private versions are the long lockup periods and opaque return expectations. Public versions traded on the stock market offer more transparency. Both types can have hefty tax implications on the income they produce. Work with a financial advisor or tax advisor before investing in either kind.

Timeshares

Timeshares and products like them are vacation destinations and primarily liabilities, not assets. If you own one or purchase one, don’t expect it to appreciate in value.

Options Contracts or Day Trading

Options or day trading usually require a sophisticated investing strategy that takes training, practice and skill. It is not likely something most people can easily pick up in their spare time in retirement. The inevitable mistakes you make to get good at it may leave you worse off than before your started.

High-Cost Investment Contracts

High, up-front costs or on-going fees to participate in an investment or income-generating business is likely to siphon money from you to the management team. If you can’t understand how an investment works, how it makes money or if it doesn’t have clear regulatory oversight, be wary. The internet and social media are full of “bulletproof” ideas that are borderline scams.

Lottery Tickets or Other Gambling Products

This one should be clear from the start. The lottery or casino cannot guarantee you a secure retirement fund.

Other Important Considerations

Deciding to take the plunge into retirement can be nerve-wracking. One of the most important steps anyone can take is to build a robust plan for how to handle certain events, whether they are financial or personal. Doing this alone is possible but hard.

It may be beneficial to work with a reputable financial advisor to offload much of the mental energy that the planning, and more importantly, the implementation, can require. An advisor can help provide time-tested strategies for an income plan that meets your needs and will consider your broader goals for work, hobbies, travel or legacy planning.

It is important to remember that concentrating money in high-growth areas builds wealth, but diversification preserves it. During the phase of your life when you depend on your assets to provide you dependable income, it is essential to prepare your portfolio to accommodate income needs in the short, medium and long terms through the use of many asset classes and investment strategies.