Retirees often face one big problem and that is not having enough money to retire or at least that is what they think. There are many types of investments that are suited for people in their golden years and that are safer than the average speculative stock. Here in this article I will be discussing some securities that are suited for people that want the best possible yield while being able to sleep at night. Some of the securities that will be discussed are treasury bonds, preferred shares, and high quality divided stocks that are almost recession proof. Read on to learn how to live better during your retirement and when is the best time to buy these securities.
Investing Options For Retirees
Learn how to maximize your retirement income. Choose investments that beat inflation and secure your purchasing power.
Bonds from the U.S. Treasury are one of the safest investments around and normally they offer decent yields that may be appealing to people that need more income to live. They are guaranteed by the U.S. Government but as of late the yields or low thanks to the 2009 recession and monetary policies that are in effect to spark the economy but, interest will probably increase by 2014. Retirees should wait a little until interest start to rise before investing in long term bonds. Short term bonds are a better option for now even when yields are low. Bond prices in the market move in the opposite direction to yield for this reason it is better to wait for yields to go up before buying long term bonds.
Another great option for those interested in buying investment grade securities from the United States are Treasury Inflation Protected Securities commonly known as TIPS bonds. These are bonds from the US Treasury that can appreciate in value according to inflation. TIPS bonds normally have lower yields that other securities offered by the US treasury but since both the principal and interest payments are adjusted for inflation they make great investment.
Example of TIPS bond performance assuming that there are no external factors other than inflation affecting yields: A retiree buys a TIPS bond for $1000 with a 2% yield. The person would expect to receive $20. If inflation runs at 5% during the year the investor will end up with a bond with a principal of $1050 and receive $21 dollars in interest. These are great investments for retirees because one of the problems that a lot of them face is that they invest in fixed income securities that over the long term don't beat inflation. As more years pass their lifestyle starts to deteriorate more and more as inflation eats away they purchasing power every year.
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Preferred shares are a great option for those that are looking for fixed income securities that offer high yields. They are safer than the average stock but are also subject to interest rate risk like bonds. They go up in value when interest rates are low and go down in value as interest rates go up. Preferred shareholders get special treatment if a company goes into liquidation. After the company pays its debt, preferred shareholders come a close second. This means that owners of preferred shares have a higher chance to get their money back than owners of common stocks who normally get cents on the dollar when a company goes belly up. The good thing about preferred shares is that they normally have yields that are higher than bonds. Preferred shares that yield more than 6% are a great option for retirees because that yield is higher than the average inflation rate. The best time to buy them is after a market crash when the value of stocks plummets. A bad time to buy them is when treasury yields are on the rise and they are selling above par value.
It is very important to read the information that the company issues regarding their preferred shares, shareholder rights, dividend policies and to determine if shares can be called by the company and when. Retirees should never invest in preferred stocks that are near their call dates if they are selling above their par value.
High Quality Dividend Stocks
Dividend stocks with high yields are also good investments for those that are looking for income. There are some companies that are stable enough to survive even the worst recessions and that have been churning out profits for many decades, the good thing about dividend stocks is that companies might raise their dividends. Be on the lookout for stocks that raise dividends higher than the inflation rate. As long as dividend payments increase higher or equal to the rate of inflation your purchasing power is safe. Stocks carry risks and the person who buys then needs to be aware of the risks that each company faces.
Retirees should look for companies that are not drowning in debt and that manufacture products or services that do not become obsolete. Some of stocks that are very good options are high yielders in the consumer staples sector, diversified REITs, and highly diversified companies that do not depend on a few products to make a profit like some conglomerates and some health related companies that make prescription drugs and at the same time make brand name over the counter products.
The best way to minimize risk is to invest in a mutual fund or ETF that covers your desired asset allocation. Mutual funds and ETFs have their expenses but for those that don't have the skills to determine a good investment from a poor one, funds are the way to go. For example; an investor that is interested in TIPS bonds can buy a TIPS bond ETF and get income from a laddered TIPS bond fund. If the persons also wants to benefit from high yield stocks the person can find a high yield stock ETF or mutual fund that is managed by a professional. This way the person owns a diversified portfolio and avoids the risk of owning only one single company or a handful of stocks.
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Many retirees use the money they saved for retirement to cover their living expenses. This is one of the easiest ways to end up flat broke. The best approach is turning that money into additional income and use it to supplement social security income and other passive income sources that the person has developed. Corporate bonds are another option. They behave like Treasury bonds but need a little more research. If you are interested in them and don't know how to read a balance sheet go for a bond fund or ETF to be safe.