There are safe and risky investment solutions for future retirees, including traditional and ROTH IRAs, debt and equity securities, futures, options, and warrants, and others.
There are plenty of options to choose from, and some sound familiar while others are less known. The pool of instruments includes bonds, stocks, limited liability transactions, contingent liability transactions, structured capital-at-risk products, collective investment schemes, and others.
Risky Investments
It is a good idea to pick safer investment instruments before you approach retirement because of the prospect of diminished earning power. Most retirees live on social security benefits or pensions. Safe investments such as money market accounts, certificates of deposit, and bonds are good choices, but there are risky products to avoid. One strategy is to include risky instruments in a balanced portfolio to mitigate risks while another option is to avoid them altogether. In general, risky investments are characterized with volatility and the potential of high returns. The risk of loss is also higher. Examples include high-yield debt instruments, leveraged loan products, business development companies, and others. Individuals who invest in business development companies are exposed to high liquidity, credit, and market risk. High-yield debt instruments are problematic because different entities are involved in underwritings. At the same time, some of them have high financing and cash flow requirements that increase credit risk. Other risky investment vehicles include exchange-traded funds, commercial mortgage-backed securities, variable annuities, and others. Some products look like a safe option, but this depends on the state of the economy and other factors. Variable annuities, for instance, offer multiple benefits, and the main ones are tax deferred gains, predictable income, and flexible options. At the same time, high surrender charges and long holding (maturity) periods are the main downsides for investors with short-term liquidity needs.
Safe Alternatives
Whether a product is considered safe depends on the investor’s risk profile. The good news is that there are safe investments with higher than average returns. They offer interest income and predictable payments. The list of safe options includes government issued securities, savings and money market accounts, CDs, and fixed annuities. Fixed annuities, for example, are in the form of contracts with insurers. Investors benefit from the fact that they offer guaranteed returns. Safe instruments offer a different degree of liquidity. Fixed annuities are less liquid than cash in your money market or savings account. Government issued securities are another safe option to consider. They are offered in the form of bills, notes, and bonds, and payment is guaranteed by the government. Investing in arts, commodities, and hedge funds carries a higher risk.