7 High-Return, Low-Risk Investments for Retirees
August 6, 2024
7 High-Return, Low-Risk Investments for Retirees
By Kate Stalter & Brian O’Connell
These investment strategies can help retirees balance risk and return to protect capital and generate income.
Retirement investors often find themselves trying to establish the right balance between risk and reward. More risk in the form of stocks can potentially generate a higher return. However, smoothing returns by including lower-risk investments in a portfolio can help savers weather poor market conditions while still creating the income they need.
“There are a few areas of concern that retirees and older retirement savers are facing in the current investment landscape, and balancing risk and reward is a common worry,” says Dan Rawitch, founder of the University of Options, a stock-trading educational platform. “While retirees often desire more income, this typically comes with increased risk. The fear of losing their principal is a significant concern.”
In an uncertain market environment, dichotomies are abundant, seemingly on a daily basis.
Investors have recently seen the Nasdaq reach all-time highs, along with expectations for the Federal Reserve to start cutting rates. “Yet a rate cut can make it challenging to find safe investments in bonds,” Rawitch says.
Here are some ways investors can incorporate lower-risk vehicles as part of a retirement strategy:
A money market fund is a type of fixed-income mutual fund that invests in highly liquid, short-term, low-risk securities.
“Most funds allow you to access your money without penalty and can provide taxable or tax-exempt interest depending on the type of fund you choose,” says James Martielli, head of investment and trading services at the Vanguard Group in Malvern, Pennsylvania.
For example, he says, Vanguard offers low-cost money market funds such as the Cash Reserves Federal Money Market Fund (ticker: VMRXX), which has a current yield of 5.3% and requires a $3,000 minimum investment. Other fund families also have low-cost, high-yielding money market funds.
“These can be great options for unexpected expenses or goals with a three- to 12-month saving horizon,” Martielli says.
Dividends are a reliable source of income for many retirees. Well-established, profitable companies with a long history of increasing their shareholder payouts are popular choices for retirement savers.
There’s good reason for that: According to 2024 research from Hartford Funds, since 1960, 85% of the S&P 500’s cumulative return was due to reinvested dividends and compounding.
“Historically, dividends have played a major role in the long-term returns of stocks,” says Martielli. “There are multiple dividend-focused investment strategies that have different risk and reward characteristics, including high-dividend-yield strategies and dividend growth strategies.”
He notes that high-dividend strategies generally involve investing in companies that offer above-average dividends relative to their valuation. Such strategies, he says, can be appropriate for investors who want to generate high current income from their portfolios.
“Dividend-growth strategies, on the other hand, tend to invest in companies that have a history of increasing their dividends,” he says.
Ultra-short fixed-income exchange-traded funds, or ETFs, invest in short-term bonds, which translates to low risk along with slightly higher yields than money market funds. They’re a sound choice for investors interested in preserving capital, particularly during periods of market volatility.
“Ultra-short income funds offer a compelling opportunity, providing high interest rates as well as the potential for some price appreciation if interest rates decline,” says Jason Dall’Acqua, a certified financial planner and founder of Crest Wealth Advisors in Annapolis, Maryland. He adds that municipal bond funds can also offer tax-free interest income.
Investors with low risk tolerance frequently gravitate toward certificates of deposit, but these vehicles are also appropriate for anyone saving for the short term. For example, if you plan to purchase a new car or new roof in the next few months, stashing money in a CD offers protection along with a set return.
The most common CD terms range from three months to five years, but you can also find products with shorter or longer terms.
“Investing is always very personal. If you prioritize locking in a good long-term rate and are nervous about how rates will change, a longer-term product may be the right choice,” says Ben McLaughlin, chief marketing officer and president at financial technology company Raisin in New York.
“If you’d rather get a higher rate for a shorter duration, a shorter-term product may be a good choice. CD laddering is also an option for people looking for the best of both worlds,” he adds. Laddering means purchasing various CDs with different maturity dates.
“Rates are expected to go down later this year, so now is a good time to lock in an attractive rate,” McLaughlin says. “Savers should be sure to do their research before investing, as rates on multiyear CDs are often lower than shorter-term CDs.”
An annuity is an insurance product that provides regular payments to the owner. They’re typically used as a way of protecting principal while providing a guaranteed return.
“Annuities are available regardless of your health status, making them accessible to retirees with preexisting health conditions or those who have difficulty qualifying for other types of investments,” says Shawn Goheen, president and founder of Goheen Insurance in Sugar Land, Texas.
Annuities can serve as protection against longevity risk, or the possibility of running out of money in retirement.
“Annuities can help preserve against the risk of outliving your savings by creating a steady lifetime income stream,” Goheen says. “They grow tax deferred and are taxed when distributions begin.”
He notes that this offers retirees a source of income to help them cover living expenses even beyond their life expectancy, creating a measure of financial security.
As interest rates rose in recent years, high-yield savings accounts grew in popularity.
For example, McLaughlin says his company now offers high-yield savings accounts with rates up to 5.27% annual percentage yield. He says those rates indicate that it’s a good time to open a high-yield savings account, which is a place to salt away money that you may need immediately. There’s no lock-up period on a high-yield savings account, as there is with a CD.
“As long as you have enough in your checking account to cover daily household expenses, a HYSA is a smart place to put extra cash, build up an emergency fund or keep money you are saving for a big purchase in the future,” McLaughlin says.
Treasury bonds, backed by the U.S. government, offer a combination of low risk and stable returns.
“Treasury bonds are bulletproof from a risk perspective,” says Matt Willer, partner and managing director of capital markets at Phoenix Capital Group in Denver. “Rates are reasonable depending on how far out you want to go, but I like the appreciation opportunity in addition to the yield that likely comes as rates drop.”
Willer adds that savers may want a longer-dated exposure to capture capital appreciation in addition to yield. “I think that strategy will provide a yield to maturity that is superior to any CD without compromising on safety, and you have better liquidity,” he says.
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