Ten Low-Risk Retirement Portfolio Strategies
28th Oct 2021
Financial Advisor Insights
14 Min Read
The year 2020 was a year of uncertainty, anxiety, and financial hardships. The anxiety was particularly felt by the stock market globally, including the U.S. With the rise in COVID-19 cases, the market plummeted to extreme lows. As the pandemic began spreading in March and the world shut down economic activity, economic panic ensued, and uncertainty caused the stock market to crash. On March 16 2020, the Dow Jones Index fell nearly 3,000 points and closed at 20,188, losing 12.9% value. The index further lost 37% of its value between February 12 and March 23, 2020. Retirement portfolios lost 30% in these two weeks.
As the country went into lockdown mode, over 20 million people lost jobs, several businesses were closed, and the virus continued its spread. However, even as the world expected everything to worsen, the market witnessed a rebound in April 2020. Alterations in interest rates and the introduction of fiscal rescue packages worked as life support for the market. The rebound was strong, and the financial healing was eventually effective. The first half of 2021 was much different than the first six months of 2020. With the market reversal, the Standard and Poor’s 500 Index reported 15% growth in the first half of 2021, comparatively on the higher side in comparison to full-year growth.
Even though the market adjustments were effective, several retirement portfolios lost millions in value, owing to the sudden stock market crash. Some investors pulled their long-term stock investments while others, starting living off their retirement savings to fund emergency medical expenses. The economy recovered from the COVID-19 impact, but retirement planners continue to experience bumps in the road. The rising life expectancy figures and surging inflation continue to affect the retirement portfolios negatively. Retirees now need to save a much higher sum than before to ensure their non-working years of life are adequately funded and they do not outlive their savings in the long term.
While stock market volatility is an undeniable truth, you can create an optimally diversified portfolio to evade significant losses of such sudden market crashes. If you are a low-risk investor nearing your retirement age, consider investing in some low-risk investment options to ensure your retirement savings are secure even if they grow moderately. Financial experts suggest adopting a more conservative approach as you approach your retirement years. However, given the stock market unpredictability, it is advisable for all types of investors, even those far from their retirement, to include some low-risk securities in their retirement portfolio. If you need help in choosing investment options that would enable you to build a diversified investment portfolio geared towards meeting your retirement needs, consult with a professional financial advisor. The advisor can also suggest low-risk retirement portfolio strategies that you can implement to maximize your savings and investment returns.
Here are ten low-risk retirement portfolio strategies you can use:
- Real estate investment trusts (REITs): REITs are a low-risk investment option for you if you want to invest in real estate but do not have sufficient knowledge or enough capital for it. Typically, REITs are companies that own or manage commercial real estate like medical centers, shopping malls, apartment buildings, offices, warehouses, data centers, retail centers, etc. These companies either own or mortgage these commercial properties to generate a fixed income for investors. REITs function like mutual funds, where they pool capital from different investors and distribute dividends from these real estate investments by selling or renting them. As an investor, you do not have to own, manage, or finance any property. Everything right from the purchase to the sale and maintenance of the property is done by the REIT. You can invest in a REIT directly, through an exchange-traded fund (ETF), or with a mutual fund. There are different types of REITs, such as retail REITs (shopping malls and freestanding retail infrastructure), residential REITs (multi-family rental apartments and houses), healthcare REITs (hospitals, nursing facilities, medical centers, nursing homes, etc.), office REITs (rental office buildings), and mortgage REITs (government-sponsored companies that buy secondary market mortgages). In total, all types of REITs own over $3.5 trillion in gross assets across the U.S. REITs have become a popular option for investors, especially those with a low-risk appetite because of numerous benefits. REITs provide the much-needed diversification to your retirement portfolio and potentially higher total returns at overall low risk. REITs preserve capital and generate assured dividends, which proves highly advantageous in balancing retirement portfolios. Further, REITs have a low correlation with other assets like stocks, bonds, etc., making them a perfect retirement portfolio diversifier.
- Dividend-paying stocks: Irrespective of the stock market volatility, financial experts recommend investing at least a small portion of your retirement portfolio in stocks. There is a particular category of stocks that is much less risky than high-growth stocks. This category is known as dividend-paying stocks. Dividend-paying stocks are of companies that pay out regular dividends to their shareholders. These are stable, well-established companies with a proven performance and track record of distributing regular dividends to shareholders. Your dividends might fluctuate with the market but may not fall as far during the market crash. You will get a consistent income from dividend-paying stocks and capital appreciation over time. Hence, these stocks are considered less risky than growth stocks. Buying dividend stocks is beneficial for your retirement portfolio to generate income or build wealth by reinvesting dividend payments. However, one significant pitfall of investing in these stocks can be when the dividend-paying company declares a loss and trims or eliminates the dividend. But if you are slightly careful in your selection or consult a professional financial advisor, you can do a better job in evading the risk of non-payment of dividends. Choose companies with a long track of dividend payments to investors, even in the worst market cycles, crashes, etc. Regular dividends reflect the company commitment towards shareholders, which is assuring and relaxing for you as a retirement planner.
- Preferred stocks: Another low-risk investment option you can include in your retirement portfolio is preferred stocks. Preferred stocks combine aspects of common stock and bonds, offering regular income and ownership in the company. Often described as hybrid security, preferred stock owners enjoy a higher claim to dividends or asset distribution than common shareholders. Apart from combining the secure, regular payments of bonds and equity ownership advantages of common stocks, preferred stocks benefit you in the form of a rise in share value over time. As long as the company is financially healthy, you will benefit from investing in preferred stocks. This is because you will potentially receive a larger payout as preferred shareholders receive preference over common stockholders but after bondholders. The high dividends, which resemble the regular bond interest payments, can provide passive income from your retirement portfolio. Preferred stock dividends also enjoy preferential tax treatment. These dividends are considered qualified dividends and attract a lower tax rate than bond interest. However, these stock investments have their risks too. Dividends from preferred stocks are not guaranteed, unlike most bonds. If the company loses money, it might decide to lower or eliminate any dividend. Hence, it is advisable to be cautious when investing in preferred stocks and choose companies that align with your unique goals, risk tolerance, and investment horizon. These stocks trade on a stock exchange like any other stock, which implies you can study and assess these stocks before purchasing.
- Money market accounts: Money market accounts are one of the safest investments for retirement. A money market account is similar to a savings account and offers the same benefits but requires a higher minimum deposit than a savings account. When you open a money market account, you earn interest at pre-agreed rates like a savings account. However, it is beneficial to invest in a money market account because rates on these accounts are higher than savings accounts. This type of low-risk investment gives you the flexibility to spend your cash when you need it. Also, there is no risk of principal even in the worst market cycles because money market accounts are secured by the FDIC (Federal Deposit Insurance Corporation), which guarantees up to $250,000 per depositor per bank. But, in some cases, money market accounts have restrictions on the monthly withdrawals, similar to a savings account. While there is no risk in this retirement investment, it does not add much to your retirement corpus. It is not wise to put a large sum in these accounts as the interest earnings are insufficient to outpace inflation in the long run. This means that you could lose your purchasing power over time.
- Fixed annuities: Fixed annuities are popular and beneficial low-risk retirement investments. A fixed annuity is a contract with an insurance company, where the insurer agrees to pay you a fixed income over some time in exchange for an upfront payment. You can choose to structure the annuity to pay a fixed sum of income over a specific period or until your lifetime. The payment is usually made monthly over a period, generally during retirement. In a fixed annuity, you pay a lump sum and receive monthly payouts starting immediately. You can also schedule to receive your payouts at a future date, such as your retirement date. Fixed annuities are desirable in a low-risk retirement portfolio because it offers a guaranteed income stream during the non-working years of your life. This means you have financial security in retirement. Apart from generating consistent retirement income, fixed annuities allow your money to grow on a tax-deferred basis. There is no restriction on maximum contribution in a fixed annuity. Depending on your contractual terms, fixed annuities offer additional benefits such as minimum guaranteed payouts and death benefits. However, in terms of risk associated with these retirement investments, it helps to be wary of the contract terms and comprehensively understand your annuity contract to know what you will get during retirement. Annuities are considerably illiquid. Hence, if you want to end the annuity before its maturity, you might be liable to a penalty. Also, if inflation rises higher than the annual average rate of 3%, fixed annuities might not remain a feasible retirement investment.
- Corporate bonds: All types of retirement income strategies focus on including corporate bonds in the retirement portfolio. Whether you are a high-risk or low-risk investor, allocating a portfolio of your savings in corporate bonds may be advisable. Corporate bonds are bonds issued by companies that vary in risk. Low-risk corporate bonds are issued by large profitable companies, and high-risk corporate bonds are issued by smaller, lesser-known companies. The riskiest and the lowest category of bonds is also known as junk bonds. The higher the risk of bonds, the greater will be the payout and vice versa. High-yield bonds usually carry low ratings and are of low quality. Investing in high-risk, high-yield corporate bonds expose your retirement portfolio to interest rate risk and default risk as well. Therefore, you may need to be cautious when selecting corporate bonds for your retirement investment portfolio. Corporate bonds qualify as low-risk investments only if you choose high-quality and high-rated bonds. To mitigate the interest rate risk associated with corporate bonds, you can seek short-term investments in this section. Long-term corporate bonds are subject to interest rate fluctuations. To reduce the default risk associated with corporate bonds, invest in bonds of reputable, large companies or create a diversified corporate bond portfolio.
- Treasury bills, notes, bonds, etc.: One of the best investments for retirement is Treasury bonds, also known as T-bonds. T-bonds are a type of fixed-income debt security issued by the U.S. government with a maturity between 10 and 30 years. Over the years, despite the high returns from stocks and related equity investments, the popularity of Treasury bonds has remained indisputable. You can invest in these bonds with a minimum of $100. Other types of securities issued by the U.S. federal government include U.S. Treasury bills, Treasury notes, government bonds, Treasury securities, etc. Each of these securities has a different maturity period. These securities are allocated by the U.S. Department of Treasury to raise money for different federal government operations. Treasury bonds provide income in the form of coupons. These securities are auctioned monthly in multiples of $100. The price and yield of Treasury securities are determined during the auction. You can buy these securities from the bank or broker. T-bonds and similar securities do not offer high returns as stocks, but these low-risk investments are ideal for the diversification of your retirement portfolio. You have the assurance of principal and a fixed income stream to sustain your retirement expenses even if stock investment value plummets. The interest receipt on T-bond and other Treasury securities is tax-free for states and localities. However, you have to pay taxes at the federal level, like other market securities.
- Life insurance: Ideally, everyone requires a life insurance policy to safeguard the lives of their family after their demise. The purpose of life insurance plans is to provide a financial shield for the family instead of generating retirement income. However, life insurance can function as an additional income during retirement. This low-risk investment option can benefit you as a retiree if you are slightly short of funds each month. The safest investment for retirement is whole life or universal life insurance policies. These policies compound tax-deferred each year. Life insurance plans have a parallel relationship with interest rates. When the interest rate rises, the cash value of life policies increases, and dividends rise. Whole life insurance plans also guarantee an increase in value every year. Life insurance plan dividends are competitive with mutual funds but are much higher than a typical 10-year Treasury bond. However, be mindful of the drawbacks before investing in whole life insurance policies. Undoubtedly, life insurance plans are the safest investments for retirement, but if you want to encash the insurance policy, you would be liable to pay penalties and other fees. If you take a loan against the insurance policy, your death benefit is reduced. If you cannot pay back the loan, the death benefit payable to your beneficiary is used to pay the loan.
- Home Equity or other income-producing properties: One of the best investments for retirement is buying a home during the earning years of your life. Home equity serves as a beneficial retirement investment. You can sell your home or take a home equity loan to fulfill a sudden expense during retirement. However, tapping home equity for retirement expenses is not advisable unless necessary. Further, it is not a low-risk investment since buying a home requires a significantly large sum of money. Also, if the home values drop in the future, you would be subject to significant losses. Alternatively, instead of selling your home, you can plan for retirement and invest in income-producing properties that generate rent each month. There is a risk in this retirement investment if the tenant does not pay the rent. Additionally, if you own income-producing property, you will be subject to property taxes and maintenance costs.
- Savings accounts and cash deposits: A low-risk retirement portfolio is not complete without holding a small amount in savings accounts and cash deposits. The primary purpose of using these low-risk investment options is to maintain liquidity during retirement. FDIC-insured bank accounts and certificates of deposits (CDs) generate a fixed income and assure the safety of the principal. You can withdraw your funds from these investments anytime you need them. You can use this low-risk retirement investment option as your emergency corpus.
Holding on to riskier investments like stocks is important to generate high returns, especially if you are young and in the accumulation stage of life. However, the markets can be volatile, and if you prefer low-risk, are nearing your retirement age, or have already retired, it can be beneficial to create a portfolio that majorly comprises low-risk investments. Further, low-risk retirement investments are critical because they bring the much-needed diversification to any low-, moderate-, or high-risk retirement income strategies. But each of the above low-risk investments has its benefits and drawbacks. Hence, as a prudent retirement planner, it can be judicious to study each option in-depth and create a low-risk retirement portfolio aligned with your investment goals and retirement needs. If you are unsure of the most suitable investments for your retirement needs, consult a professional financial advisor. Use the free advisor match tool and get connected with 1-3 vetted financial advisors who are suited to help you.