Registered Retirement Income Fund

7 High Return, Low Risk Investments for Retirees

MANY PEOPLE spend decades in retirement. That’s certainly good news, but it also presents the challenge of making your savings last throughout a long lifespan. Here are seven investments for retirees that could help you earn a decent return without taking on too much risk.

1. Real estate investment trusts. Real estate investment trusts invest in mortgages or direct equity positions in various properties. They pay dividends to their investors, and that yield is usually higher than what you can get from stock dividends. REITs are good investments to hold when the general stock market is in decline. This is because REITs are not correlated with stock exchanges, meaning that they are unlikely to go down with the rest of the market.

2. Dividend-paying stocks. Many well-established companies pay dividends on their stocks that are higher than what you can get on safe investments, such as certificates of deposit and U.S. Treasury securities. Of course, being stocks, they aren’t as safe as fixed-income securities, but they do come with the potential for capital gains.

This gives dividend-paying stocks a reasonable combination of growth and income. In addition, a high dividend will enable you to ride out a prolonged decline in the stock market, since you might continue to receive income on your stock even if the underlying stock price fluctuates. Dividend-paying stocks often do better than growth stocks in bear markets, since investors tend to shift attention from growth to income. You could also purchase an index fund comprised of numerous dividend-paying stocks. Even if you’re mostly interested in preserving your investment capital in retirement, having part of your portfolio invested in dividend-paying stocks will provide you with ongoing income and capital appreciation, which could help you deal with inflation.

3. Peer-to-peer lending. Better known as P2P, peer-to-peer lending has been growing steadily since it began in 2005. Peer-to-peer lending takes place online and matches borrowers and investors in loans that benefit both. It’s basically lending without using a bank as an intermediary. The two largest P2P lending platforms are Lending Club and Prosper. Many P2P investments pay out a higher interest rate than you are likely to get on your stock market investments. However, the risk (and reward) can vary considerably based on who you lend money to.

4. Municipal bonds. Municipal bonds are debt securities issued by state, county and municipal governments and their various agencies. The primary advantage is that the interest you earn is tax-free for federal income tax purposes. They may also be exempt from state and local taxes if you live in the state where the municipal bonds are issued.

Twenty-year municipal bonds currently pay an average of about .2 percent higher than what you can get on 30-year U.S. Treasury bonds. That’s a higher yield with a shorter maturity. But when you add in the tax-free benefit, municipal bonds look even better.

5. Annuities. Annuities are investment contracts between you and an insurance company. They come in different forms, and usually include a guaranteed return at a stated rate. Annuities can be either fixed or variable, and the rate of return may hinge on the performance of the stock market. However, an annuity contract may include a provision that will limit your downside risk in the event of a market decline.

It’s important to pay attention to the fees and commissions an annuity charges, which can be very high. Many annuities have complicated features, so take the time to fully understand the product and get a second option before buying one. Also, take a close look at how an annuity will change your tax liability.

6. U.S. Treasury notes and bonds. Yields on U.S. Treasury notes and bonds are a good deal higher than what you can get on certificates of deposit and money market funds. This is because both notes and bonds are longer-term securities that pay higher interest rates as a result. For example, Treasury notes, which are U.S. government debt securities with maturities between two and 10 years, currently pay almost 2 percent per year. Treasury bonds, which have terms of 30 years, are running in excess of 2.5 percent. U.S. Treasury securities of all maturities and types can be purchased through the U.S. Treasury portal Treasury Direct.

7. Treasury inflation-protected securities. Treasury inflation-protected securities, better known as TIPS, are another form of U.S. Treasury debt. What separates them from other Treasury securities is that they pay the interest and additional principal to compensate for inflation.

TIPS come in denominations of as little as $100, and in terms of five, 10 and 30 years. The annual inflation adjustment is based on changes in the consumer price index. The percentage change in the value of the security is added to the principal value, rather than being paid out like interest. When the TIPS mature, you are paid the higher value based on the CPI. However, the value of your TIPS could also drop if there is deflation.

Due to the inflation adjustment, TIPS pay lower interest rates than other U.S. Treasury securities with comparable terms, but the inflation adjustment can produce more attractive results. Like other Treasury securities, TIPS can also be purchased and held through Treasury Direct.

There’s no single investment that is the ideal retirement asset. The best strategy is to have many different types of assets in your portfolio to prepare your investments for different kinds of market environments.

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