3 investment ideas for retirees now

Ah, retire. Imagine a long and blissful walk on the beach. Or you watch the sunset from the balcony of your ship and think: This is – the way life should be. Then you casually check your smartphone to see how your investment accounts are doing, and gasp! You may not be as rich as you thought.

Pensioners are facing major headwinds at the moment when it comes to investing: troubles in Ukraine, high inflation and a tense stock market to name a few. If you’re in retirement or about to retire and are wondering what to do with your portfolio, here are three ideas I share with some of my clients:

1. Consumer defensive stocks

I want clients to be as diverse as possible. However, I might lean their portfolio toward consumer defensive stocks for retired or more conservative clients. Defensive stocks generally include utility companies such as natural gas and electricity providers, health care providers and companies whose products we use every day, such as toothpaste companies or food and grocery stores.

According to the Center for Corporate Finance, a leading financial educator for financial professionals, defensive stocks tend to be less volatile than other types of stocks. Less volatility could mean less upside potential, but it could also mean less downside risk, which I find is what many retirees want – less downside (and hopefully better sleep at night).

2. Bonds for retirees – but not just any bonds

I love municipal bonds for retirees. Municipal bonds are issued by states, cities, or local municipalities. There are many types of municipal bonds. Municipal general obligation bonds are backed by the tax authority of the issuer—meaning the state or municipality uses taxes to pay interest to bondholders. Revenue bonds are municipal bonds backed by a specific project. The fee route uses fees as revenue to be paid to bondholders.

Interest on municipal bonds is usually exempt from federal tax (although there may be alternative tax (AMT) considerations for certain types of investors). If you live in the state in which the bond is issued, the interest may be exempt from state taxes as well.

I like tax relief for retirees for several reasons. Retirees may have other sources of taxable income, such as annuities, annuities, or rental income, whose income may push them into a higher-than-expected income tax bracket. Retirees may also take money from 401(k)s and traditional IRAs in retirement for the required minimum distributions, which are taxed as ordinary income. Having some tax-free benefits may prevent a retiree’s income from creeping into the next higher tax bracket in retirement.

Findings from the 2019 Municipal Finance Conference indicate that there is less risk of default with general obligation bonds than with revenue bonds. This is because revenue bonds usually depend on the viability of the project, which is more uncertain than a state or municipality’s ability to raise taxes to pay for a general obligation bond. For this reason, I might lean the portfolio toward general obligation municipal bonds more than revenue bonds for retirees.

Municipal bonds are not without risks. There is no guarantee of the underlying value and the market will fluctuate so that the investment, if sold before maturity, will be more or less than its original cost. Like any bond, municipal bond prices may be negatively affected by higher interest rates. Also, municipal bonds may be more sensitive to an economic downturn—investors may fear that a struggling country’s economy may be unable to repay the bonds.

For these reasons, I like to be as diverse as possible. I use short-term mini bonds for more fundamental stability and reduced interest rate risk. I may also mix in medium-term municipal bonds for additional yield. If the portfolio is greater than $250KI I prefer buying individual municipal bonds for more allocation and tax harvest opportunities.

3. Beyond stocks and bonds

I like to spread small amounts of other investments. I call these my “satellites”. Depending on the customer’s financial situation and tolerance for risk, I may add in real estate or small amounts of commodities, including coal, gold, corn and natural gas. I generally use mutual funds or exchange-traded funds for the sake of diversification and relatively low cost. I usually only buy small amounts, maybe 2%-5% of the portfolio, to help diversify the portfolio and provide a hedge against inflation.

Inflation is a real big enemy of retirees. Higher prices erode the purchasing power of the portfolio. One of the good things about owning real estate is that the owner can often raise rents, which is a hedge against price hikes. I can buy real estate investment trusts (REITs) that group different properties together. I may also use private REITs, which are not publicly traded, so they are less liquid for more experienced investors. Private REITs are not for everyone, as they tend to carry higher fees, and they do not publish daily rates, but they often provide a higher return than publicly traded REITs.

For more information on fighting inflation, check out my blog post Can Inflation Affect Your Retirement Plans?

parting thoughts

Investing in retirement is different from investing while working. When you retire, the investor’s time horizon shrinks–they need money sooner to live and there’s no salary coming in to replenish the account. There is also less time for the portfolio of retirees to recover from the stock market correction. That is why I find retirees fear losses more than they enjoy their gains.

Understanding these differences is important for successful investing in retirement. Using these three approaches — shifting a bit more to defensive stocks to consumers, using municipal bonds to help prevent more taxable income, and adding small amounts of inflation-fighting investments like real estate and possibly commodities — can all help smooth the way for retirees, in my opinion.

The author provides advice on investing and financial planning. For more information, or to discuss your investment needs, please click here To schedule a free call.

Disclaimer: Summit Financial is not responsible for the hyperlinks and any external reference information contained in this article. Diversification neither guarantees profit nor protects against loss. Investors cannot buy an index directly. Individual investor portfolios should be created on the basis of an individual’s financial resources, investment objectives, risk tolerance, investment time horizon, tax situation and other relevant factors.