In this article, we will discuss the best investment options for retirees.
This topic is particularly relevant nowadays, as numerous investment opportunities continue to pop up over time—and many of these advertisements in fact target retirees. But why? As we all know, this segment of the population has had a lifetime to save, and others are all too anxious to tell them what to do with their money. On balance, the older generation does have more money than their younger counterparts. As we get into this article, we’ll discuss mainly high-level, tried-and-true investment options that retirees can put their money into and in turn act as good stewards.
There are certainly other opportunities available with more risk and those that rely on a particular company or person who is making the offering. However, if these parties are incompetent or—worse yet—dishonest, then the investment itself is rendered useless due to the scam. On the other hand, the same types of offerings and investments from people with integrity, expertise, and a solid track record with high levels of competence can actually be very good. Many of these types of investments are geared toward accredited or qualified investors of a higher net worth.
passive Options You Know
Now, let’s engage in a discussion about the best investments for your money. One of my top recommendations is that people should invest their money into something they are already familiar with. For example, if you are well-versed in an opportunity that you know you can feed your money into and earn a better return than others, this is a sound investment strategy. Perhaps you have a talent for running a coin-operated car wash: something unfamiliar and/or uninteresting to most people. However, for you personally, you can invest $200,000-300,000 into this business and earn a solid return on your money of 18 % or 22% a year; whereas others might not enjoy this same opportunity.
With this in mind, you first want to consider activities you're really good at and are confident you can put your money into and reap a positive return. For many people, that activity is rental real estate.
For me personally, I know that years ago after my divorce, I decided to move into a four-bedroom house with a basic apartment down in my basement: a completely unused area. It had a bedroom, full bathroom, and a kitchenette and living area. I decided to invest about $12,000-15,000 to renovate the area, furnish it, and list it on Airbnb. My return on this investment was outstanding. As such, for me now personally, I can confidently rent out property on Airbnb or other short-term vacation rental sites and generate a much higher return than most others because I know what I'm doing.
If you have something like this (with a minimal time investment) in your back pocket during retirement, I would first suggest you explore related opportunities accordingly.
You might also find opportunities, perhaps with friends or family members, to invest in sound businesses or franchises and ultimately expand. You can feel comfortable doing so with trusted people, who will perhaps offer you a much higher return than just placing your money into varied types of securities or insurance products.
Network with Friends and Family for Special Opportunities
Hence, explore within your network and consider income-generating activities you’re primed for based on your life experiences—affording you an opportunity to earn more money than you would through traditional routes, which we'll discuss in a moment. Beyond just my own personal experience, rental real estate is a common investment opportunity I see among my clients. Some will simply buy a rental property and hire a management company, wherein they’re not really generating a return that's any better or worse than other investors. That is not what I'm talking about in this particular instance. What I am referring to is the ability to move your money into a rental property in a highly skilled manner, paving the way for you to generate an optimal return within the rental real estate arena—something many of my clients do as well.
For example, a friend of mine from Georgia Tech transformed his basement into a rental property containing multiple sleeping accommodations for airline pilots who require a place to stay for just one night—a prime opportunity, as he lives near an airport. Rental homes and real estate is an extremely competitive market. If your sole plan is to buy a home and rent it out via one-year leases, this is a less-than-spectacular plan to generate extra returns and probably not something that will rise above your standard level of allocation.
Another talent-based investment strategy you can consider is to launch a part-time business in something you’re well-versed in. Let's say you are retired but have experience with plumbing, electrical work, painting, hauling junk, or pressure washing. These are examples of types of work you may be well-seasoned in, providing an opportunity to put your money into a small business and seek out low-cost marketing opportunities to draw customers. You can work part time—5, 10, or 20 hours a week—and pay yourself a tremendous amount of money per hour for work that comes naturally to you. This presents another distinct retirement investment strategy, particularly if you're in your 60s and 70s, providing you with a solid return on your investment. Of course, there is a decent amount of labor involved here, but the upside is the ability to pay yourself an extremely high rate—perhaps $40-50+ per hour.
Securities (stocks, bonds, ETFs, mutual funds, variable annuities, gold ETF)
Finally, let’s discuss traditional types of investments you can use to diversify your money that require no participation on your part: mainly, securities.
When I refer to securities, I'm talking about global stocks and bonds, as well as all types of ETFs and mutual funds. When you invest in securities, you want to have great diversification and to choose a route using low-cost ETFs and mutual funds from companies like Vanguard, DFA, or Schwab. The other path you can take—which we've discussed in previous articles—is to hire a professional money manager to select stocks for you and concentrate those positions in their area of expertise: for example, large-cap or small-cap.
While writing this article in December 2021, one distinct concern I have regarding the stock market is that it's truly overvalued. Historically speaking, valuation is somewhere in the high 30s right now; whereas historically, the average price earnings ratio hovers around 15 or 16, meaning we’re currently at more than double the historical average. In short, stocks are very expensive right now. Examining the rate of return for stocks from January 1994 through November 2021, this has averaged about 10.5% a year. If you go back a few more years before that, stocks had a return of 10.95% in 1987. So, let’s say stocks have a likely historical average of around 10% a year.
One of the most concerning things about this is that not only are stocks overvalued, they've way outperformed their historical norms over the past 10 years. Over the past 15 years, stocks have grown by 10.26% a year—about the historical norm. However, over the past 10 years specifically, the S&P 500 has averaged a return of around 16% per year—about 5-6% higher than typical returns over the past 10 years. That's a lengthy amount of time for any investment to outperform its proven track record and performance, as 6% per year is 60% higher than what it should be.
Over the past five years, these figures get even worse. The US Stock Market is currently averaging about 17.5% per year, or 20% over the last three years, specifically. Now, when I say the US Stock Market, I'm referring to the S&P 500. So, as we close in and come down from 15 years, we can see that the S&P 500 and large-cap US stocks are way out of whack with average historical performance parameters.
In considering retirement investment opportunities, stocks give you an option to help keep up with inflation. Mix in some global stocks, which have averaged about 5.8% per year since January 1987 (a figure that climbs to 6.97% and then 9.4% over the past 10 and 5 years, respectively). Allocate a tad bit more for US stocks, adding bonds to your portfolio securities as well.
there's Gold in them there hills
I also recommend gold, which is not considered a security but can be invested in through the ETF GLD as a security if you don't want to buy physical gold.
The ETF ticker symbol GLD does hold physical gold and tracks its spot price quite well, something I have always been very pleased with.
US Treasury Bonds
And so, you want to put together a great mix of those portfolios. I also like to add treasury bonds, which is a great diversifier because it shares a negative correlation with the US Stock Market. In addition to using the total US bond market for our clients, we also use US treasuries—which possess a slightly negative correlation to the global and US Stock Market historically as well, affording you great diversification.
If you construct a portfolio in this manner, let's say with 33% in long-term US treasuries, 33% in global stocks, and 34% in gold, this would boast a really good track record—performing quite well on a long-term basis. In fact, since the dawn of 1986, this combination would average about 8% a year. That's very good, especially in light of its worst downturn being only 20% from March to October of 2008. It would've only taken 11 months to recoup all of your money, which is notably good as the 2000-2013 stock market broke even over those 13 years. Adding diversification can help ensure you're not under water for a long period of time, waiting for your money to eventually balance out.
Now, in reviewing the information shared in this article, let's summarize four key takeaways:
1. Be sure to look into investment opportunities you're aware of and most people perhaps are not privy to. In doing so, ensure the parties presenting these opportunities have high levels of integrity, competence and, preferably, a great track record.
2. Put money into something that you can personally operate and put a little effort into (and/or an activity giving you an edge over others, given your related talents), which will offer you a better return on your money than just relying on the stock market.
3. Assemble a well-diversified portfolio of global stocks, US bonds (including US treasury bonds), and gold. This will afford you smoother long-term performance than simply placing your money into one of these asset classes.
Although not mentioned here, No. 4 (which we've discussed in previous articles) is with respect to annuities. While we didn’t discuss this today for the sake of brevity, be sure to click on this link if you'd like to go learn more about annuities and what they can offer you in retirement.
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If any of you would like to discuss your best investment options during retirement, click on this link to set up a 20-minute no cost, no obligation retirement rate of success call with me. We can go over where you are now, where you want to be, and I will share with you some tips I implement with my clients to help ensure retirement is the best stage of their life.