Posted by Paul F. Lynch
Many seniors who rely on income from their investments to meet living expenses were shaken by the recent recession and the stock market roller coaster ride. Now that the economy and the markets are recovering, you may be breathing a sigh of relief. However, rising costs of living can still make it a challenge to maintain your current standard of living. And it’s impossible to predict how markets will perform in the future.
When you were younger, you could make some investment mistakes because you had many years to make up for them. As a retiree, you need to be more careful. But if you take a sensible approach to investing, you can withstand market volatility. Here are a few general guidelines:
Invest for Growth as Well as Income
Since you can no longer rely on your income to increase and keep up with inflation and cost of living increases, your investments must grow with inflation and also provide adequate interest and dividend income.
Stocks and real estate generally provide the most consistent, inflation-beating returns.
Maintain a Diversified Portfolio That Is Appropriate to Your Needs
A balanced portfolio should consist of both interest-earning investments (like bonds and CDs) and stock investments. You should still have a higher proportion of your savings invested in interest-earning investments than younger people . But if your portfolio doesn’t include any stock, it may suffer from the erosive effects of inflation. Typically, retired investors should emphasize high-quality stocks with good dividend-paying records, or mutual funds or exchange-traded funds that include such stocks.
Where an interest-earning investment is concerned, pay attention to the interest rates paid on various securities. A little comparison-shopping among local banks or on the Internet may uncover very attractive rates paid on FDIC-insured CDs. It’s smart to spread your money around to various types of interest-earning securities.
Don’t React Impulsively in Response to Market Uncertainty
Sometimes retirees get themselves into financial trouble because they react too hastily to unfavorable investment market conditions. Certainly, you need to be concerned about keeping your money safe amidst economic uncertainty. If you get nervous and want to concentrate more of your investments in safer securities, that’s fine, but do so gradually. Or, you may feel you’ve invested too conservatively. Change your investments gradually over a period of time. That way, you won’t suffer as much if you guess wrong.
Don’t Make Risky Investments
Just as you have to maintain a balanced portfolio of carefully-selected investments, you also need to avoid making risky investments. Unfortunately, retired people are favorite targets for opportunistic or unethical salespeople who recommend overly risky or otherwise inappropriate investments. The best way to avoid this is to stick with straightforward investments that you understand. Be particularly careful of high-yield (high-interest) investments. Opt instead for high-quality interest-earning investments.
Keep Short-Term Money Safe
Retirees are understandably unhappy if they have to sell investments that have lost value in order to pay their bills. It’s better to give that money a chance to recover its losses. To avoid this situation, keep the equivalent of two years’ worth of expenses invested in no-risk securities, like CDs and money market funds. That way you won’t be compelled to “sell low” to pay your bills.
Depending on your age, annuities may be a safe and appropriate investment vehicle for you. To learn more, call SBLI at 1-800-438-7254.