How the Safest Investments for Retirees Went Wrong
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How the Safest Investments for Retirees Went Wrong


Retirees who put their money into low-risk investments like Treasuries and certificates of deposit (C.D.’s) thought they were doing everything right.

But the Federal Reserve’s decision to keep core interest rates near zero since December 2008 in an effort to spur borrowing and overall economic growth has hurt the nation’s retirees who often depend on such safe investments for current and future income.

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Retirees holding fixed-income investments such as U.S. Treasuries to maturity also will have trouble getting strong returns with current yields. The yield on a 10-year Treasury note is roughly 1.5 percent, while 3-month and 6-month Treasuries have a coupon rate that is near zero. And C.D.’s are rarely earning more than 1 percent, if that. With core inflation — excluding food and energy — at an annual rate of 2.1 percent in July, any investment that is earning less than that diminishes a retiree’s buying power.

With savings rates so low, experts say retirees may be risking more than they realize by not making more aggressive investments.

Adrian Larson, president at Pathlight Investors LLC in Phoenix, said anything that is as safe as cash is going to earn extremely low rates. “If you want safety, you are the one paying for it,” he said. “And for most people, you are not getting an adequate return.” 

Retirees who hold too much of their investment portfolios in cash also face the risk of inflation and a loss of purchasing power. Many seniors are so focused on trying to preserve their savings, they don’t notice they are losing ground when their expenses start rising because of inflation and their investment portfolios stay the same, according to Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “Inflation is one of the greatest risks facing retirees, said Ablin. “But it’s not one that you spot until it is too late.”

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But investment experts say there are steps retirees can take to both protect their savings, and maybe even earn a little more without taking on a lot more risk. Here are four tips for retirees to grow and preserve their retirement savings:

1. Corporate and municipal bonds and preferred stock
Rick Robinson, regional chief investment officer at Wells Fargo Private Bank, said corporate and municipal bonds and preferred stock are practical ideas for retirees who want low-risk investments. Those investments offer an additional yield of about 0.5 percentage points to 4 percentage points over Treasuries.

Corporate bonds also provide additional safety; in the case of a bankruptcy, bond holders get paid before stock holders. Robinson said retirees that are willing to take on additional currency risk may also want to consider purchasing international bonds.

Many highly rated companies are holding record levels of cash, making them the new safe haven alternative to Treasuries for many seniors.

Bob Jackson, president of Jackson Financial Advisors, said seniors should focus on short-term corporate bonds to shield them from interest-rate risk. And Larson cautions that demand for corporate bonds may have pushed yields too low to compensate retirees for the risk — if interest rates rise, the price of corporate bonds will fall. He still wouldn’t rule them out, but says a yield of 2 percent to 4 percent is still too low for most of his clients.

2. High quality, dividend-paying stocks
Investors, especially retirees, still view equities with a wary eye, but advisors say they shouldn’t rule out stocks — especially dividend-paying equities.

“We are big believers in high quality, dividend-paying stocks,” said Larson. “Our type of company typically raises its dividend every year, which ultimately means that your income is rising every year as well.”

Tom Blanchfield, managing director of investments at Merrill Lynch Wealth Management in Newport Beach, Calif., said many seniors focus too much on the volatility of equities, when they should be looking at how they are performing relative to other asset classes. “It’s about holding them in the right percentages,” he said. “I certainly would not advise any client to hold all equities.”

Blanchfield says he recommends that clients consider holding companies that focus on needs such as the energy and food sectors, rather than things consumers want. “You don’t have the sense that these companies will be out of business in five years,” he said. “But if you look at the yield, relative to other alternatives, they are still really cheap.”

Robinson said investors also should consider preferred stocks. Preferred stockholders are paid before common stockholders if a company fails, and often receive a dividend.

Jackson recommends purchasing an exchange-traded fund of preferred shares because it’s a relatively safe, low-cost alternative to owning individual companies, but “it’s difficult to get into preferred shares without a professional,” he said, and encourages everyone to talk to a financial advisor before proceeding.

3. Diversify, diversify, diversify
Though no one is advised to put all of their eggs in one basket, seniors should be especially careful.

Because of the meager yields in high-quality fixed income investments like Treasuries and corporate bonds, Ablin said Harris Private Bank has focused on driving returns from other parts of the market, including preferred stocks, real estate investment trusts, and equity investments that regularly distribute dividends.

Ablin said that mix is yielding about 3.5 percent to 4 percent and is a substitute for bond investing. “Retirees are increasingly willing to take on more risk for higher yields,” he said. “REITs, which are a hybrid security, are one of the best-performing market securities this year.”

Jackson said seniors considering purchasing REITs should make sure they do their homework first. He uses research from Blue Vault Partners LLC to find highly-rated, non-traded REITs, which are designed to reduce or eliminate taxes. They tend to have higher yields, but can have higher upfront fees and can’t be sold as easily as traded REITs. “There are some that have been real stinkers over the years,” he said. “They aren’t a sure thing.” Jackson said non-traded REITs are yielding about 5 to 6 percent, while traded REITs are in the 4 to 5 percent range.

4. Keep a small percentage of the portfolio liquid
While focusing on generating income is great, investors who take a portfolio approach to managing their investments shouldn’t rule out keeping a cash or highly liquid allocation as a small percentage of the portfolio, according to Blachfield. “Keeping some cash gives you options,” he said, that allows retirees greater flexibility when one asset class sells off and there is a buying opportunity.

Blachfield said retirees should work with their advisers to develop a disaster plan. That could mean setting aside up to 20 percent in cash or other liquid assets in case the market would slump rapidly.

Larson said there is no “easy” solution. “In order to have enough income, unfortunately you have to take on more risk,” he said.