What Are the Best Types of Investments for a Retiree?
As we're looking to answer this question, it’s important to remember that there is no one particular investment that a person would want to invest all their money in. A successful investor looks for diversification, the most important aspect of a portfolio, in addition to having legitimate investments.
One of the first investments for retirees that we’ll discuss are global stocks, which are stocks from companies all over the world. The United States and developed countries in Europe and Asia are the countries where I recommend most of my clients have their money. I'll usually recommend that my clients have somewhere between 60% to 75% in US-based companies, and the rest of their portfolio in foreign stocks, primarily in Europe and Asia.
Stocks have been around for many decades and have offered investors a great way to not only keep up with inflation, but to also experience returns that outpace inflation. Stocks are, typically, small pieces of ownership in companies that are being publicly traded. In this article, I'm not referring to privately held stock; I'm referring only to publicly traded stocks. These are stocks from companies that are traded on the New York Stock Exchange, for example. There are other foreign indexes as well, where stocks are publicly and easily traded.
Stocks help investors to maintain their purchasing power over a long period of time. Of course, there have been extended periods of time where the market doesn’t experience growth. 1929 to 1954 and 1966 to 1982 are two such periods, where investors saw no growth over a 25-year and 16-year period of time, respectively. More recently, from 2000 to roughly 2013, the stock market didn't grow much at all; it was practically break even for all intents and purposes.
Another great investment for a retiree are bonds; specifically global bonds. You don't want to be in just US bonds; proper diversification would look something like 60% in US bonds and 40% in foreign bonds. Foreign bonds are a great diversifier for currency risk and are probably the most highly correlated asset class next to gold. US bonds are not correlated to US stocks or gold. Unfortunately, bonds do not offer an investor much in the way of interest rates today. For many years, bonds have paid interest where people could earn money off of their investment while it was sitting inside of these instruments. However, with interest rates currently being so low as a result of bonds being on a 38-year bull run, it's very difficult for investors to accrue much interest through bonds.
However, bonds still offer the two most important things that they have always offered: preservation of capital and diversification. Preservation of capital cannot be overstated as an important reason to buy bonds. Both US and foreign bonds offer investors a non-correlated asset class and a place to put their money that will not perform like the global stock markets. This is an important key to achieving investment success.
With bonds, you don't just want to invest to make money. An investor must view bonds as a way to preserve their capital in times of stock market corrections, or even worse, global recessions and depressions. Bonds have long offered investments that have been viewed as the safer way to invest your money into securities, rather than stocks.
Real estate is another tried and true investment where people can invest their money, maintain their purchasing power, and grow their money depending on what type of real estate they invest in. There are many different ways to invest in real estate.
With real estate, you are able to buy a piece of property, whether it be a single-family home or a building, and rent it out in order to generate income for yourself. We have many clients that are retirees who do this. In fact, we helped one of our clients set up a single-family home to produce a triple net lease profit to them, where they're getting a very good return without having to do much work on their money. They're getting paid regularly about 6% to 8% a year on their money, and they have an insured home that is also growing . So their total yield in their investment ends up being more than 6% to 8%, but their income flow is 6% to 8% on their money. An investment such as this can generate excellent returns for you without you needing to do any work or being involved in any way with the money and it can be reliably set up.
We helped one of our clients do this using short-term vacation rentals. They are absolutely thrilled with the results that they're seeing and the money that they're making every single month with the booming and remarkably fast growth of companies like Airbnb.
Real estate has for many decades been a wonderful way for retirees to invest their money safely and conservatively. When I say safely and conservatively, I do not mean that doing so carries certain guarantees like from a CD or money market account, or even a fixed annuity. Safely and conservatively means that you can put your money into something that you know is real and can have it insured. You can put your investment property into an LLC to further protect you from lawsuits. Additionally, this type of investment gives our clients an opportunity to predictably produce income, as there will always be a need for housing.
Another wise investment for retirees is precious metals, mainly gold. Gold is considered a monetary metal, which offers clients a great way to diversify away from the global stock market, and even inflationary assets like real estate. During the financial crisis of 2008, gold still offered investors a 5% return that year. When assets like real estate and global stocks were going down quite a bit, gold held its ground and even went up some. That's what we have with gold being a monetary metal, as it offers great diversification through its non-correlation to the global stock market. It's not just good for diversification, gold has also had good historical growth, and offered investors anywhere from 5% to 7.5% a year on average since we came off of the gold standard in 1971. You can read my in-depth article on gold and silver investing here: https://thirdactretirement.com/blog/gold-silver-good-retirement-investment
Finally, I want to briefly discuss annuities. I have also written a detailed article on annuities, and that you can read by clicking here: https://thirdactretirement.com/blog/annuities-retirement-good-idea-strategy. Annuities are a tax-deferred vehicle and can be just as risky as putting your money in stocks or as safe as putting your money into CDs; it all depends on the type of annuity that you purchase. There are many different types of annuities, such as a variable annuity that's going to offer no guarantees to the investor, and you can lose all of your money if it goes down and you pull your investment out. Just as you would with the stock market, a variable annuity is a tax-deferred insurance wrapper that can give someone the opportunity just to invest in the stock market.
Another way you can use annuities to grow your money tax-deferred outside of IRAs is through a fixed annuity, which are guaranteed. When you invest your money, you get a certain return each year, and then at the end of that time period, you have an opportunity to roll it over to another annuity, or to just take the money and pay the taxes on the gains. Annuities are good investments and you can buy them through fee-only fiduciary wealth managers and financial planners like me without having to be penalized when you pull your money out. If you buy an annuity from someone that is making a commission off of it, you will often have to keep your money in the annuity or you may only be able to withdraw 10% per year from the annuity. This offers you some flexibility, but it doesn't offer you complete liquidity like the other types of securities discussed in this article. Real estate is similar in this regard in that you don't typically have the liquidity as you would with stocks, bonds, or gold.
Annuities that are variable can offer investors immediate liquidity if they are not being purchased and a commission is being paid. The type of variable annuities and fixed annuities that we use with our clients allows them to put their money in and take their money out anytime they want. Another aspect of annuities that separates them from the other investments discussed in this article is their ability to offer certain types of buffers and guarantees.
For example, you want to invest money and the annuity offers you a 20% buffer if you hold for five years. If you invested $100,000 and at the end of those five years the stock market is down 20% from the time of your initial investment, the 20% buffer would ensure you receive you initial investment of $100,000 returned to you. If the market were down 21%, you'd get $99,000 back.
Putting It All Together
These are some of the most common investments that I believe are great for retirees. They offer investors an opportunity to put their money into something that they know is not a Ponzi scheme and is not going to be an extremely risky investment based on its legitimacy. These type investments have been around for a very long time and have proven to be successful. The other great thing about these investments is that if you put them together in the correct fashion, they can not only produce income for you, but also offer you great diversification against different economic environments in the world. Whether it’s inflation, stagflation, depression, recession, or deflation, the investments discussed in this article can provide financial security for anyone.