As of late 2007, Baby Boomers began collecting their Social Security payments, marking the beginning of an interesting time when there will be a long list of them in the retirement age. Due to their size alone, they form a demographic category that has more total spending power than anyone else on the globe, which in turn makes their investing and spending power very impactful on the U.S. investment landscape and the economy overall.
Those approaching retirement must keep in mind that the choices they you make today will affect what their financial status will be 20 years (or more) down the line. This is the minimum one can expect, given that the average life expectancy for the baby boomer has been calculated as 83 years.
Here are 5 best investment strategies that you must consider:
Variable Annuity (VA)
Believe it or not, the value of insurance become more important as you approach your retirement age. While traditional whole life policies still remain, there now exist some newer, more updated theories and products which have garnered enough attention to make their own place. One such product is the variable annuity, which permits investors to sign up for what is very much like an insurance policy, the only difference being that the balances can be invested into bonds and stock holdings.
Variable Annuities allow holder to gain on cash balances above inflation, which is a key factor in keeping your insurance’s value. That being said, it is always better to be safe, and select a variable annuity with restraint, given that fees for each type tends to be very different. Also make sure that you understand every fee that you are paying, from annual fees and underlying investment fees to front- and back-end sales fees.
U.S. Treasuries actually make up for the sole investment for many retirement-aged individuals. With yields that are regarded as a benchmark of safety (the risk-free rate of return), treasuries make for a very safe and reliable investment, especially when the odds are risky. All treasury bonds are controlled by the U.S. government, which has so far not defaulted on a single Treasury bond. No matter how you access exposure to Treasuries, from individual bonds and mutual funds to exchange-traded funds, and others, they lend a lot of weight to your overall portfolio.
For those above 60 years of age, capital preservation is much more essential than capital appreciation. Not only do treasuries offer this, they also offer a steady stream of income and a chance for you to preserve your assets during inflation. While municipal and corporate bonds are sold in the same manner, they tend to have higher default rates and require more research to be done by the investor for evaluation of merits.
Certificates of Deposit (CDs)
CDs stand only second to Treasuries thanks to their high yield (which often goes higher than that of Treasuries of the same maturity), as well as the feel-good factor of giving your hard-earned money to an established financial institution like a bank. Plus, there is the Federal Deposit Insurance Corporation (FDIC) insurance. The only thing there is to remember here is that there is a threshold of $250,000 per bank, since the FDIC insures a specific limit to individual account holders. If your amount is greater than this, you will have to spread your money over several different banks.
As with any demographic, real estate is an investment that pays well if done wisely. As someone approaching retirement, there are many avenues you can explore: from buying a second property and/or rental property, to converting from a paid-off mortgage to a smaller but more efficient home. Many people actually enjoy moving to a smaller home and/or a new location. These options will help provide asset diversification and help you save on taxes, as well a offer you a place where you can spend that much-deserved extended vacation-time.
You must keep in mind to not take such decisions lightly though, and must consider consulting a certified advisor before you actually decide to embark on a decision. After all, there is a lot that needs to be considered here, from your net-worth diversification and liquidity needs to your finances and personal tax situation. Plus, if you opt to keep a rental property, you will yourself have to put some work and effort behind it.
Individual Retirement Account (IRA)
It is virtually impossible to make a best investment strategies list that does not have this option, and for good reason. In fact, if you’re one of those who has been investing for years, you probably have a well-funded IRA already. Once you retire, your 401(k) assets will roll over to either a Roth or a Traditional IRA. And in case you’ve crossed the age of 50, you can add more than your standard annual contribution limits to your account. IRAs make a particularly good strategy, since they have the ability eliminate capital gains taxes and reduce your future tax bills significantly.
Both the Roth and the traditional IRA have their own advantages. While asset transfers to a Roth IRA are not tax-deductible (meaning you still have to pay income taxes), the income that you will go on to receive will be completely tax-free. Furthermore, the assets in your IRA must reflect your overall asset allocation.
Special Mention: The Wild Card
Yes, we mentioned five investment strategies. But we decided to include this spot for those who apprehensive of spending 20+ years sitting around having nothing to do. While good investment ideas do involve careful financial planning, they also sometimes (if not always) involve (being creative and following your passion). In fact, any one of your hobbies can function well as an investment opportunity. This includes several activities such as:
- Starting your own business
- Classic cars
- Paintings and fine arts
- Coins and collectibles
- Sports memorabilia
That being said, you must be well aware that these too have their boundaries. After all, there is no point in starting a business which will keep you so busy that you finally get in way over your head. However, if there is something you are truly interested in – and preferably have good knowledge about it, you must not hesitate to take it further, now that you will enter a phase in your life when you actually will get the time to do so. We do live in a world that is brimming with possibilities and age is really just a number. So long as you stick to putting a fixed percentage of your net worth (a maximum of 10%), you will be completely fine.
Now that you are approaching retirement, the choices you make can and will affect how you will be leading your lifestyle for decades to come. You must, therefore, make sure to properly think about what you need, set your goals, and then set about selecting the best strategy (with the help of a professional) to achieve said goals.