The official first baby boomer started collecting Social Security payments in late 2007, beginning a long and powerful wave of boomers reaching retirement age. As a demographic with more concentrated spending power than any other on the globe, how these individuals invest and spend will have a profound impact on the investment landscape and the U.S. economy as a whole. (For more on the impact of the baby boomer generation, check out Demographic Trends And The Implications For Investment.)
If you're approaching retirement, the choices you make now will affect your financial future for 20 years or more, as the average life expectancy for baby boomers is 83 years and rising. Below are 10 investments - some specific types of assets and securities, others account vehicles - you should consider.
Investment No.1 - U.S. Treasuries
Any good list of investments for retirement-aged individuals could start and end here. Treasuries are the ultimate in safe, reliable investing - in fact, their yields are often considered the literal benchmark of safety (the risk-free rate of return) - when modeling more risky investments. The U.S. government has never defaulted on a Treasury bond, making them a beacon for investors all over the world. However you access exposure to Treasuries - via mutual funds, exchange-traded funds (ETFs) or individual bonds - they should have a high weighting in your overall portfolio.
For the vast majority of investors over the age of 60, capital preservation is more important than capital appreciation (such as gains from stocks). Treasuries provide this, along with a steady stream of income and a good shot at preserving your assets in the face of inflation. Corporate and municipal bonds are also solid investments in the same vein, but default rates are higher and more research may need to be done on the part of the investor to evaluate their merits. (Read more in Buy Treasuries Directly From The Fed.)
Investment No.2 - Certificates of Deposit (CDs)
In addition to often paying a higher yield than Treasuries (of the same maturity), CDs have the feel-good factor of giving your money to a bank, along with its Federal Deposit Insurance Corporation (FDIC) insurance. The all-important threshold is $250,000 per bank; that's the limit up to which the FDIC insures individual account holders. Amounts greater than this should be spread out over several different banks. (This goes for checking and savings accounts as well. Read Bank Failure: Will Your Assets Be Protected? to learn how the FDIC protects your money.)
A service called the Certificate of Deposit Account Registry Service (CDARS) allows you to deposit more than the FDIC limit at participating banks. Other banks in the network will effectively insure portions of your investment by creating CDs for you at their banks. All of your money stays in one place (and so does your personal information) while you get FDIC insurance on the whole of your deposit - and just one 1099 form come tax time. You can go to CDARS.com to find more information and see if your bank is a member of the service.
If you wish to hold several individual CDs, consider using a laddering strategy whereby you spread maturity dates out evenly over a window of three to five years. This way you don't have all your money committed at one interest rate, and you can benefit from higher rates that may be available one or two years from now. (Learn more in Step Up Your Income With A CD Ladder.)
Investment No.3 - Unit Investment Trusts (UIT)
Unit investment trusts often come with little fanfare, and you won't see them advertised as heavily as mutual funds or other investment products. The reason is that they're generally not as profitable for the people creating and managing them. And that's great news for investors in the know.
UITs can have either stocks or bonds as their holdings, but most unit trusts will have a deliberate focus on either capital appreciation or generating a consistent income. The key differentiating feature between mutual funds and UITs is that with unit trusts, the portfolio is established once, and remains fixed for the life of the investment. Typically no changes are made to the portfolio after the initial public offering. With debt UITs, when individual bonds mature, each investor receives his or her pro-rata share of the redeemed bond as cash. (Learn more about the basics of UITs in 20 Investments You Should Know: Unit Investment Trusts.)
While investors know exactly what they're getting up front, unit trusts also come with a big tax advantage over mutual funds. You're only responsible for the capital gains that you earned - you'll never be faced with paying capital gains tax on somebody else's money, as often happens with mutual funds. (Read more about saving on capital gains tax in Capital Gains Tax Cuts For Middle-Income Investors.)
Investment No.4 - A Managed Sub-Account With a Registered Investment Advisor
Putting at least a fair portion of your liquid net worth into the hands of a trusted investment professional is the single best choice for most people. There are enough professional certifications within the world of investing to make anybody's head spin, but a good registered investment advisory (RIA) firm should have both Chartered Financial Analysts (CFA) and/or Certified Financial Planners® (CFP®) in its employ. (Read more in The Alphabet Soup Of Financial Certifications.)
A registered investment advisor earns fees (typically as a percentage of assets) for the service of creating and maintaining a portfolio custom-suited to each investor. They are registered with the Securities and Exchange Commission (SEC) and must adhere to strict reporting and presentation standards to ensure fairness to investors. (Read more in What Is A Registered Investment Advisor?)
The minimum investment required to get started used to be quite high, but RIAs are no longer just for the high-net-worth group. Thanks to cost savings from electronic trading and other recent market efficiencies, RIAs can take on new clients with as little as $100,000 dollars in some cases.
This option provides great tax advantages in that a professional with knowledge of your whole tax situation can be managing your gains and losses for the year. Also, it's nice to have a seasoned pro watching over your portfolio - someone who can manage financial events that will shape your life in the coming decades. Good advisors will also give advice about your overall picture, including assets not managed by them directly.
Fees will vary, but this competitive field can be accessed for about 1% per year, roughly the same as your average mutual fund. (Read more in Paying Your Investment Advisor - Fees Or Commissions?)
Investment No.5 - Life-Cycle Funds
Life-cycle funds are meant to change over time, becoming less risky with their investments as their investors age. Almost all life-cycle funds will specify a target date in their titles, and while you'll want to verify exactly what that date means by reading the fund prospectus, most represent a target date for the retirement of its shareholders. For example, the Vanguard Target Retirement 2025 Fund structures its asset allocation for investors reaching retirement age between 2023 and 2027. (To learn more, read Life-Cycle Funds: Can It Get Any Simpler?)
Life-cycle funds are a solid choice for investors who want a one-stop holding over the course of many years. On day one of their existence, these funds will likely have the highest risk level they will ever have; over time, the funds will increasingly focus on income generation and capital appreciation by increasing fixed-income asset exposure and scaling back stock exposure.
Many life-cycle funds can be purchased with no sales loads, and many offer competitively low expense ratios as well. Some funds will hold sets of other mutual funds or ETFs, while others have individual securities selected by fund managers.
Investment No.6 - DRIP Plans
Dividend reinvestment plans (known as DRIPs) allow investors to have their quarterly dividend checks automatically reinvested into a single dividend-paying company. Hundreds of companies offer these plans, including most of the large-cap companies that make up indexes like the Dow Jones Industrial Average and the S&P 500 index.
DRIP programs may be offered by the company itself, or by a third party like your broker or a transfer agent. The main advantages of DRIP programs include:
- The ability to dollar-cost average into a stock automatically
- Savings on stock commissions - in most cases there are no trading fees
- The option to purchase fractional shares and even buy shares at below-market prices
- The ability to get started for as little as $10 and add money over time
DRIP plans need to be balanced out with other investments, as they don't do much to diversify your portfolio. But they are generally a very cheap way to get increasing exposure to top-notch companies - the kind that have historically provided the best returns to investors. You can find out if your favorite company offers a DRIP plan by contacting their investor-relations group or visiting their website. Also check with your broker to see about any special programs that may be available through your existing accounts. (For more information, read The Perks Of Dividend Reinvestment Plans.)
Investment No.7 - Real Estate
You may find yourself considering a second property, a rental property or a conversion from a paid-off mortgage in your primary home to a smaller, more efficient home. Any of these can be a good choice, able to provide asset diversification, tax savings and a place to spend some of that all-important extended vacation time. (To read about the benefits of moving to a smaller home, see Downshift To Simplify Your Life.)
Real estate decisions are not to be taken lightly, and most investors should strongly consider consulting advisors before pulling the trigger on any transaction. Your whole picture should be considered, such as your net-worth diversification, your liquidity needs and your personal tax situation. But many people enjoy the prospect of moving into a smaller home, possibly even in a new area and with modern energy-saving and green amenities. Others like to have a property they can rent out, which often can pay for most of or the entire mortgage. (For more on buying rental property, see Top 10 Features Of A Profitable Rental Property.)
Investment No.8 - Variable Annuity (VA)
As you approach and reach the retirement phase of life, the value of insurance becomes ever clearer. While the traditional whole life policy has not been completely wiped out of the marketplace, newer products and theories have gone to the forefront of insurance action items. One new product is the variable annuity, which allows investors to hold what is essentially an insurance policy, with the caveat that cash balances can be invested into stock and bond holdings.
This provides the opportunity for gains on the cash balances above inflation, a key component to keeping the value of your insurance over time. It's best to be stingy when selecting a variable annuity, however, as fees tend to vary widely. Be sure to understand all the fees you'll be charged, including annual fees, underlying investment fees and both front- and back-end sales fees. (For more on assessing the benefits of VAs against the costs, read Variable Annuities With Living Benefits: Worth The Fees?)
Most financial planners feel that variable annuities are best suited to people who have some level of concern about themselves or their beneficiaries outliving their money. To buy one you essentially give up some potential investment returns in order to have the added safety of insurance. (Learn some strategies for ensuring your money will last as long as you need it in Managing Income During Retirement.)
Investment No.9 - Individual Retirement Account (IRA)
No list would be complete without this cornerstone of the modern retirement portfolio. If you've been investing for many years, chances are high that you've already got a well-funded IRA. All of your 401(k) assets should end up in either a Traditional or Roth IRA shortly after you head out the door of your last job. And if you're over the age of 50, you can add extra to your account over the standard annual contribution limits. IRAs eliminate capital gains taxes and can drastically reduce your future tax bills. (Compare the two main types of IRAs in Roth Or Tradition IRA…Which Is The Better Choice?)
When transferring assets in to a Roth, you'll have to take the short-term hit by paying income taxes, but you'll gain the huge advantage of receiving tax-free income for every penny of it down the road. When planning moves to and from IRA accounts, it is again better to either know all the rules or consult a tax pro. You may find it easier to move chunks of money over several years to spread out your tax bill. But if you hope to be drawing down on your IRA for 20 years or more, the tax savings in the future makes the Roth the best option. (Learn the requirements regarding tax and penalty fees for withdrawing funds in Tax Treatment Of Roth IRA Distributions.)
Assets in your IRA should reflect your overall asset allocation. For many people, the IRA already represents the bulk of their net worth, so proper allocation of investments is all the more important. Most standard securities like stocks, bonds and funds can be bought inside an IRA account, and the IRA itself can be maintained for minimal fees at thousands of financial institutions. Finally, IRA assets can be passed on through your estate to keep the power of compounding going for your heirs. (Read about passing on your retirement savings in Stretch Your IRA.)
Investment No.10 - The Wild Card
This spot is reserved for all of you who feel a twinge of fear when considering 20-plus years with nothing to do. Good investment ideas often involve being creative and knowing what you love to do. Anything you enjoy can potentially become a good investment opportunity, such as:
- Paintings and fine arts
- Classic cars
- Sports memorabilia
- Coins and collectibles
- Starting your own business
Of course there are boundaries here. There's no sense in starting a business to keep busy, only to get in over your head. But if you have an interest (preferably combined with a fair amount of knowledge) in a particular area, you should feel empowered to take it as far as you like. After all, we live in an increasingly age-defying world, where passions and energies aren't just for the under-40 crowd. (For tips on starting your own business, read Start Your Own Small Business.)
Any of the above categories, and many more, could make for a fine investment, provided that you don't put more than a small percentage (think 5-10% max) of your net worth into it and you understand that with more esoteric investments come limitations on liquidity and other issues like physical protection, insurance and market inefficiencies.
As you approach retirement, the choices you make can affect your lifestyle for years to come. Think about what you'd like to achieve through your investments and, with the help of a professional, choose the investments that will help you reach those goals.