Low interest rates are a significant risk for investors approaching retirement
As a financial advisor, I often have the “investment risk” conversation with clients approaching retirement age. Traditionally, this has meant telling clients approaching retirement that it’s time to move into lower-risk investments. As you get closer to retirement age, you have less time to make up for any investment losses, so it’s time to focus on preserving capital. And when we talk about lower-risk investments, we’re usually talking about fixed income.
But recently, the conversations have been shifting as this is no ordinary investment environment. Interest rates have been very low for quite a while, and many fixed income investments aren’t keeping pace with inflation. So, these “low-risk” investments may not provide you with enough income to fund the retirement you want, especially since people are living longer, on average, than ever before.
So, is it time to change the way we talk about risk? And what’s the alternative?
Investing for income
The answer to my first question is simply, “Yes.” There are many types of investment risk, and losing money on your investment is only one of them. The answer to my second question is, “It depends.” Each client’s situation is unique, and so is their retirement plan.
As you approach retirement, you may still want to move some of your equity investments into interest-bearing fixed income investments. Capital preservation remains important at this stage, but we also want to think about creating income stability in retirement. That means your ideal asset mix might look a little different today than it did a decade ago.
So, if you’re putting fewer assets into fixed income securities, what will you invest in instead? This will depend on your current financial situation and your retirement goals. This is something we can discuss, as there are options to consider.
High-quality, high-dividend-paying stocks may be a solid choice. Dividends provide a steady source of income, and when a company regularly increases its dividends over time, it’s generally a sign of financial strength.
If you want to stay in the fixed income space, you might choose to invest in higher-yielding corporate bonds and reduce your exposure to government bonds. The risk level associated with corporate bonds varies greatly between issuers (and individual issues), so good research is essential. Inflation-linked bonds may be another option for you. These bonds may not always provide impressive returns, but they will preserve your capital and at least keep pace with inflation.
Making the best choices for your retirement can be overwhelming, particularly in this challenging investment environment.
Call our office today to explore your options and create a plan that will help secure your long-term financial future.