When you’re young and just getting started, you can take more risks with how you invest for your retirement. That is, if you start in your 20s, you’ll have more than 40 years to develop your pension pot. This will make it simpler to weather market ebbs and flows.
However, as you approach your retirement years, it’s critical to have a clear strategy for how you’ll afford to live on a fixed income. You’ll also need to have an awareness of where and how your money is invested.
The nearer you approach retirement, the less risk you should undertake. Be aware of which options qualify as less high risk.
Consult with financial professionals to get their top recommendations on where to invest your money if retirement is on the horizon. Consider the following low-risk alternatives:
High-yield savings accounts
While part of your money should be in the stock market, it’s also a good idea to have some on hand in an easily accessible savings account.
When approaching retirement, it is essential to have a reasonable amount of cash accessible for short-term needs and eventualities.
A smart thumb rule is to have three to six months’ worth of money in accessible reserves. These should be divided between checking and savings. Have one to two months’ worth of expenses in your checking account and two to four months’ worth of money in your savings account.
As your life changes in retirement, make sure you’re storing enough to cover your new monthly expenses. Perhaps you downsized so that your expenses are lower. Maybe your expenses are higher because you have more medical bills or have moved to a new city.
A high-yield savings account allows you to earn more interest than a typical savings account. Your money is also FDIC-insured up to $250,000 per account type per bank.
After safeguarding some money in savings, look to low-risk investments that enable you to protect capital while also accruing a bit more interest than you would in a savings account. Short-term bonds are an excellent choice since they are less affected by future volatility.
The problem with low-risk investments is that rising inflation can erode their value over time. To counteract this, consider investing in Treasury Inflation-Protected Securities, or TIPS. These are government bonds that move in lockstep with the rate of inflation. They are not only a secure investment, but they also help you diversify your retirement income.
TIPS bonds pay fixed-rate interest twice a year and are available in 5, 10, and 30 year maturities, so you can choose one that best fits your retirement timeline. Investors are paid the adjusted capital or the original capital, whichever is greater, upon maturity.
As retirement approaches, one of the best things you can do with your money is to keep it safe and accessible. TIPS serve to manage rising inflation, whilst high-yield savings accounts and short-term bonds enable your money to grow with relatively risk.
Soon-to-be retirees should preferably consult with a financial advisor. They can evaluate your particular savings and investment plans to ensure they are on track for all of their targets.