The future can be scary because so much is unknown. This can be especially true when getting ready for retirement. While working, there is some financial certainty as you bring in a secure income to pay expenses. However, that changes when you transition into retirement. How much money do you need for retirement planning, and how can you save it?
The safest way to store your retirement money is in low-risk investments or savings accounts that leave room for guaranteed growth. Some of these options include:
Certificates of deposit
Money market accounts and funds
Many would think that the best option for storing retirement savings is in a savings account. While this is a great choice for securing capital, it does not account for inflation. The total value could lose purchasing power over time. On the other hand, investing in the stock market is risky.
Which is the best place to keep your retirement savings? Continue reading to learn more.
What Are “Safe” Savings Options?
Let’s break down what safe savings options are and what makes them truly safe.
Any place you consider storing your retirement money has a tradeoff between risk and benefits. High-risk investments leave the most opportunity for you to make the most money. However, the tradeoff is a greater risk of losing money, too.
Low-risk investments have little to no risk of losing money. Instead, you cannot earn as much as you would with a high-risk investment.
A safe investment or savings option refers to these low-risk opportunities that offer lower interest rates but keep their value over time. Plus, they are easy to convert into cash.
Establish Your Risk Tolerance
Before considering where to put your money, you must determine your risk tolerance. This is identifying how much risk you are willing to afford in your investments. Do you want to go for the high-risk high-reward scenario, or is it best to play it safe?
When going about this decision, consider your age. Young people further away from retiring may want to take advantage of the opportunity for a risky investment. If something goes wrong, they have more time to rebuild their portfolio. Meanwhile, those closer to retirement may want to avoid such risks as they are closer to relying on a retirement income.
How Diversification Can Help
There are advantages and disadvantages to both high- and low-risk investments. You may choose one end of the spectrum, but a professional financial advisor would recommend you diversify your investment portfolio. This means devoting your money to a little bit of everything. It strengthens your chances of more returns.
This strategy, though, changes based on stages of life and economic stability. When younger, it could be more advantageous to focus on high-risk. When older, safety becomes a greater priority.
Where to Safely Invest Retirement Savings with Low Risk
There are many places in which you can put your retirement savings with little to no market risk. Here are some of the best options for more conservative investments:
Gold and Silver
There is no way to guarantee your retirement income retains its value over time due to market volatility. However, investing in precious metals, such as gold and silver, is a solid option during times of economic instability.
Throughout history, gold has been a reliable asset. The United States used the gold standard in the late 19th century but ceased using it in the 1930s. Still, investors can be confident in gold as its high price has existed for millennia.
Additionally, gold typically retains its value and adjusts with inflation because it is a limited metal–there is only so much that exists on the planet.
Less expensive than gold, silver is another safe place to put your retirement income. This precious metal is rare and usually maintains its price over time. On the other hand, it is more volatile than gold, so there is a bit more risk to this investment.
Overall, a financial advisor would recommend you diversify your portfolio. They often advocate that investors put about five percent of their total assets into gold or silver.
Considering humans have admired gold and silver through the ages, you can consider them safe and low-risk assets.
Fixed annuities are one of the more secure ways to invest your retirement money because they offer a guaranteed income stream.
A fixed annuity works similarly to a private pension. You first pay premiums to an insurance company to fund it. There is a guaranteed minimum crediting rate for the term you choose. If you keep your money in the account without touching it for the term, you are not going to lose money.
Additionally, there is the possibility of your fixed annuity receiving high rates. These could be between 100 to 1,000 times the rate of high-yield savings accounts. What’s more, the money is tax-deferred. You do not have to pay taxes on it until you make withdrawals.
Fixed annuities are backed by the insurance company you choose. Therefore, you must pick a company you trust.
Bank Savings Accounts
Bank savings accounts are an excellent place to invest your retirement income with almost no risk. The great benefit of having savings accounts is they are insured by the Federal Deposit Insurance Corporation (FDIC). This means that if a bank dissolves, the federal government covers the savings from your account.
The downside of opening a savings account is that the interest rates are low and do not adjust for inflation. Therefore, it is quite possible your assets could decrease in cost. Some of the best interest rates–even for high-yield savings accounts–are about 0.75 percent. You would have to invest a lot of money to see a significant return.
When it comes down to it, a savings account poses almost no danger of losing the money you own.
Certificates of Deposit
Similar to fixed annuities, certificates of deposit–or CDs–sit in an account for some time to earn interest. Usually, these rates are more significant than a high-yield savings account. However, you must keep your money in the account for the entire term.
CDs keep the money from your retirement accounts secure while gaining interest. You just have limited access to the money and the interest rate is usually not as significant as an annuity.
Treasury securities come in many forms, such as treasury bills, bonds, and notes. All of which work as debt obligations from the government. Essentially, you are loaning money to the United States Treasury. After some time, the department pays you back with added interest.
The difference between treasury bonds, bills, and notes is their maturity. Treasury bills mature between four weeks to one year. Meanwhile, notes mature over two to 10 years and treasury bonds between 20 and 30.
Another great option within treasury securities is to invest in Treasury Inflation-Protected Securities, also referred to as TIPs. The interest rate for these securities gets adjusted for inflation. As a result, your assets can retain their worth.
The United States Treasury has always paid debt obligations to those who invested in securities. They are a reliable place to store your retirement income. However, similar to CDs, they limit the use of this money and do not provide the same rates as annuities.
Money Market Accounts and Funds
Other options for your retirement savings include money market accounts and money market mutual funds. Though they have similar names, they function differently.
Money market accounts work as deposit accounts. You open them in a bank or credit union, deposit your assets, and gain interest. The total interest earnings vary based on the current condition of other market investments, such as CDs and bonds.
Money market funds are mutual funds that you purchase from a brokerage, firm, or investment company. The money goes towards investing in debt securities, such as CDs and treasury securities.
With a money market account or fund, returns are between 0.5 percent and two percent. As such, it can help you gain some interest in your retirement income, but not as much as some other options.
How Much Retirement Savings Should Go Into Low-Risk Investment Options?
Financial advisors typically recommend you diversify your investments, so you should put more assets into both low- and high-risk options. However, as you get closer to retirement, low-risk investments are probably the best thing.
Some tips for determining the total amount you should keep in retirement accounts:
Keep an emergency fund for basic living expenses totaling three to six months in liquid form to access at any moment.
The remaining money can go toward other investments varying in their risk level.
The risks can range based on your age and financial status.
Overall, talk to a financial advisor about your personal finance and what investments would pose too much risk for your situation.
Which Investment Is Right for You?
There are many ways to store and protect your retirement money, so finding the right one to support your financial goals is crucial.
A key to finding the right investment is looking at the interest earnings as they relate to the account restrictions. Having some liquid assets is necessary for everyday expenses, but putting away money to get a higher interest could help you in the long run.
If you are unsure about the next steps, be sure to talk with a financial planner to guide you to the best decision.
How to Avoid a Bad Investment
No matter where you put your money, there are always risks of an investment that does not pay off. Warning signs of a bad investment include:
Complex terms and conditions
Promising overnight returns
Promising low-risks and high-rewards
Mostly, if an investment sounds too good to be true, there is a strong likelihood of it being so. Always take precautions when looking to invest your savings.
Other Sources for Low-Risk Retirement Income
The above investment options are for storing and protecting your money over time. However, there are other ways you can contribute to your retirement income:
These are never a guarantee, but dividend-paying stocks are a way to earn some extra cash in retirement. After paying for the stock, retirees receive a payout from the company in which they placed their investment. Many companies pay regularly, but they are not required to do so. Therefore, there are some risks to this form of compensation.
Owning property is an excellent source of income. Retirees can rent out their property and receive a regular income from their tenants. You could even hire a property management company to deal with the administration.
Real Estate Investment Trusts
Also called REITs, Real Estate Investment Trusts are securities that allow you to invest in companies that own and operate income-producing real estate. The result of your investment is the company pays you a share of the income they earn.
A stable source of income is a part-time job. While the purpose of retirement is to not work, you may find yourself missing the atmosphere of working. As a result, part-time employment could bring you extra income, a stable routine, and even fun.
Strategizing when to withdraw money from your accounts can help you optimize your total earnings. As such, you can make a living from the assets you already have.
The Bottom Line
Retirement planning can be a challenging task, especially as you need to save enough money to live off. The ideal situation would be to store your money in a safe place where you can earn a little extra.
Investments in gold and silver are a great option during economic uncertainties. The market is so volatile that it can be difficult to predict when assets fluctuate. Precious metals, such as gold and silver, have historically retained their value and, therefore, make a great place to put your retirement money.
Additionally, fixed annuities can be a helpful tool for your savings. With little to no risks, you are guaranteed a crediting rate that ensures you leave with at least as much money as you started with.
Overall, there are many places to store money for retirement. Sufficient money is crucial for a healthy life, so talk to a financial advisor if you experience any concerns.