Written by Have you ever wondered where is the safest place to put my money in retirement? As you near retirement, the money you have invested in the stock market may not be safe enough. On the one hand, you want to keep your money safe. However, there are other ways to lose your money.
The cost of certainty
Leaving your money in your bank’s savings account may feel safter, but they are paying less than 1%. Which means your investment is not keeping up with inflation. If you can’t keep up with inflation, that ultimately means you’re losing money every year. It is estimated every 17 1/2 years, inflation cuts your purchasing power in half. In other words, something that costs $100 today, will cost you $200 in 17 1/2 years. That is why you need to consider other safe places to put your money outside of just your savings account.
What about a CD or money-market account?
A CD (certificate of deposit) and a money-market account are two of the safest places to put your money. CDs and money-market accounts are nice because they’re liquid and you’re going to get a little bit higher of a return than in your traditional savings account. You’ll usually get around a 1%-2%. The problem of keeping up with inflation remains. Even though you have the benefit of your money being liquid, it is losing value every year.
If you assume that inflation is ~3% and you’re going to make 1%; that means you’re losing 2% each year. CDs are a safe place to have your money, but you it should be a limited amount. You still need to make sure you have a good portion of your money outpacing inflation.
Investing with the government
Is government debt the safest place to put my money? Government debt is considered a save option for your money. They’ll pay you an agreed upon amount each year. The longer the term, the higher the payment. When you purchase treasury bills, notes or bonds, you are purchasing government debt. The debt of the United States is considered safe. Uncle Sam makes a habit of paying his bills. While there is growing concern over America’s ability to pay it’s growing debt. History shows Uncle Sam will find a way to pay his bills. Whether he is going to raise taxes, print more money, increase the debt ceiling, etc.
Even though government debt is safe, it doesn’t always outpace inflation. As far as liquidity, government debt trades frequently on the secondary market.
The safety of guaranteed income
Some will consider a fixed annuity. A fixed annuity is not the same as a variable annuity. Or the fees associated with an annuity with all the bells and whistles. We are talking about a personal pension. The promise to give you an income for the rest of your life.
You will pay for your annuity with a large lump sum you get through an inheritance or at the end of retirement. Or you will purchase a deferred annuity where you pay over a period of time. Once you are done paying into your annuity, the insurance company will annuitize your annuity. That process usually takes a couple years. Once completed, you will start to receive your monthly income for the rest of your life.
When do I get money?
You get to choose the frequency of your payment. It could be monthly, weekly or annually. Many enjoy the regular income of an annuity. It reminds them of their income when they were working. Annuities usually keep up with inflation. You can expect to see a return of 2%-4%. An additional benefit of an annuity is tied to how long you life. Actuaries will estimate your lifespan and pay you a monthly amount based on that estimate. If you outlive their estimate, the checks will keep coming. If you don’t outlive your estimate, unless you pay for a certain amount of payments, the insurance company wins.
Using real estate for safety and growth
If you have real estate, you have the option to fund your retirement with your real estate through rental income. By accessing your rental income, you can access your equity without selling your property. You can then take that rental income and invest it in a safer investment.
Final thoughts
The reality is you cannot simply pull all of your money out of growth investments. Whether that money is in the stock market, real estate or your business. While not a 1-for-1 relationship, there is a relationship between risk and return. Finding an opportunity to get a good return with little risk is difficult.
Many retirees find themselves reducing the amount of money they are aggressively investing. One allocation approach is to match your age with the amount of safe money. For example, when you’re 30, you’ll have 30% of your money allocated in a safe investment. When you are 60, you’ll have 60% safe and 40% invested for growth. Your safe investments could be government bonds, CDs, or a fixed annuity. While those investments can not outpace inflation. When combined with your growth-centric investments, your overall portfolio can outpace inflation.
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CNBC: How fast does inflation cut buying power? Here’s a simple guide
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