Our brains are hardwired to stay safe and avoid all possible risks. It’s how we’ve survived for so long.
Investments always bring a potential risk with them, but there are plenty of low-risk options out there that even the most conservative investor can get behind.
Low risk investing for retirement is a game you want to get into years before you really need to call upon it. The earlier you get into it and the more diverse you make your low-risk investment portfolio, the more secure you will be.
Let’s discuss everything you can do to secure yourself for retirement without risking it all.
How to Invest with Low Risk
Stay away from trends. If you invested in fidget spinners, you’d be pretty bummed right about now.
Take a look at society as a whole, and think of things that rarely change. Banking has been around since 2000 BC, (if you want to get more technical, banks have existed in the United States since 1791).
You want to invest in high-interest savings accounts, TIPS (Treasury Inflation Protected Securities), CD accounts, and municipal bonds, which some banks offer. We’ll get into them more in-depth in a moment.
What is Considered a Good ROI?
Your return on investment isn’t going to be sky-high with low-risk investing. It’s the trade-off you have to live with. Many people would rather have the security of their investment over high yield.
A good ROI would be between 5% and 8% for your overall portfolio, not just individual revenue streams. Individual bonds and stocks could yield a higher return, but you could also lose everything. 5% to 8% is a decent return that you can get behind.
Anything lower than 5%, and your low-risk investment might be potentially worthless. You have to have the capital to invest in the first place, and if you can’t see affixed, steady ROI roll in that’s over a couple of percentage points, it’s not worth your time.
Low-Risk Investments in Practice Today
1. Municipal Bonds
There are two types of municipal bonds: taxable, and non-taxable. You can use your imagination to determine which one people gravitate towards.
Non-taxable municipal bonds are generally exempt from all federal and state taxes of any kind, though you have to be sure of this before investing in one.
You receive payments from municipal bonds twice per year. Municipal bond rates have decreased over the years, but in 2019, you could earn as much as 4.25% from municipal bonds with a short maturity date.
2. High-Interest Savings Accounts
If you opened a high-interest savings account at the highest rate, you could see a 2.05% return. This is part of a diverse portfolio, but it can greatly benefit you in the long run.
If you start a five-year account at $10,000, adding $150 to it each month, you can end up with $1,563 of profit after five years. On top of that, you’ll have big savings account at the end.
These are nearly bulletproof ways to invest your money, but they do have a low ROI, even if you get the best rates. If you have the capital to invest, $100,000 starting balance with $1,000 monthly contribution could net you $14,000 in profit over a five-year period.
Treasury Inflation Protected Securities are one of the safest investment strategies out there. They’re based on an inflation calculator and backed by the United States treasury.
If you invested $10,000 in a TIPS account, with a 2% inflation rate and 3% face value, you would receive 3% of your investment (in this case, $300), as well as the 2% inflation adjustment. Now, 3% of your $10,000 is actually $306 on your next semiannual payment.
They’re safe and work until their maturity date, at which you get your initial investment back. It’s a good way to design some fixed income.
4. CD Accounts
You will hear plenty of people say CD accounts aren’t good for investing. If you want high yields, then they’re right; CDs are not good for a big return.
But they are good for short-term returns with little to no risk. A $10,000 investment with the national average interest rate could earn you $639 in profit by the end of a two-year term. A $100,000 investment would return $6,399 over that same time.
Two-year terms are the best to go for. If you invested that $10,000 into a five-year CD with the same interest rate, you would end up with $1,677 in profit, but that money would be tied-up and locked down for a long time.
5. Fixed Life Annuities
An annuity is a contract between you and an insurance agency, though some banks have been known to offer annuities. These require lump sum down payments that constantly yield a monthly income source.
Annuities were designed for retirees. The older you are when you get an annuity, the better your interest rate will be. An annuity is perpetuated at your life expectancy, meaning if you have an expected 15 years left to live, it will be structured based on that.
By the time your 15 year period is over, you will have earned your interest rate (typically 2.5%) over time, and every payment after that 15 year period is basically like getting free money.
A $250,000 annuity with a 2.5% interest rate (at 15 years) can yield over a $49,000 return when the period is over. Every monthly check you receive after that fact is strictly money that’s paid to you from the institution. It’s a long-term investment strategy that should be paired with a diverse portfolio.
Make Smarter Choices
With these retirement investment options, you’re not going to be a high-roller, but you will have security and the peace of mind that comes along with it.
I’d rather have a low-risk investment and sleep well at night than constantly checking the news to see if my money plummeted overnight.
Make smart decisions, and as always, contact a financial advisor prior to sinking your money in anything. You want to be sure it’s legitimate, fixed, and guaranteed (as much as anything can be).