As a 72-year-old retiree, you’ve worked hard to save for your golden years, relying on conservative financial tools like certificates of deposit (CDs), bonds and high-yield savings accounts to preserve your capital and generate steady returns.
But there’s one problem: The Federal Reserve just threw you a curve ball by cutting interest rates. Such a move is designed to stimulate economic activity, but it can also lead to lower yields on fixed-income investments. With more cuts expected to follow, banks are responding by lowering the rates on high-yield savings accounts.
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If you’re a retiree with a low risk tolerance, rate cuts are significant since you depend on your interest-earning investments to cover living expenses while avoiding stock market volatility.
So where can you safely put your cash to still earn a decent return? Let’s explore some options in a low-interest-rate environment, focusing on safe and stable investments that align with your risk tolerance.
CD laddering
Certificates of deposit are a favorite among retirees because they offer a predictable return with minimal risk. But the rate cuts mean the returns on new CDs are likely to be lower than what you’ve been accustomed to. One strategy to mitigate this is known as CD laddering.
It works by spreading your cash across multiple CDs with varying maturity dates. For example, instead of putting all your money into a five-year CD at today’s lower rates, you could invest in one-year, three-year, and five-year CDs. As each CD matures, you can reinvest the profit into another longer-term CD at a potentially higher rate, depending on market conditions.
The benefits are twofold: It provides you with regular access to portions of your cash in case interest rates rise or you need liquidity, and it avoids locking all your savings into a long-term, low-rate CD.
Treasury bonds and TIPS
Treasury bonds remain one of the safest investments available. They’re backed by the U.S. government and have little risk of default. However, with interest rates falling, the yield on newly issued Treasury bonds can also decrease.
One alternative is Treasury Inflation-Protected Securities (TIPS), which provide a fixed interest rate but also adjust for inflation — keeping your purchasing power intact even if inflation erodes the value of fixed returns.
Read more: Rich, young Americans are ditching the stormy stock market — here are the alternative assets they’re banking on instead
High-yield savings accounts and money market accounts
Though interest rates on high-yield savings accounts have dropped in recent weeks, these accounts still offer a better return than traditional savings accounts while providing fast access to cash. Both high-yield savings accounts and money market accounts are typically FDIC-insured up to $250,000 per depositor, offering the security that comes with being backed by the U.S. government.
Low-risk bond funds
If you’re comfortable with a little more risk than CDs or Treasuries but still want to keep things conservative, bond funds focused on government or investment-grade corporate bonds may be suitable. Bond funds pool money from multiple investors to purchase a diversified mix of bonds, which helps spread the risk.
There’s always the possibility of market volatility, and interest rates will still affect bond prices. For a retiree, a short-term bond fund might make more sense, as these are less sensitive to interest rate changes versus long-term bonds. Short-term bond funds tend to offer more stability, even if the returns aren’t as high.
Dividend-paying stocks
While retirees with low risk tolerance typically avoid stocks, some dividend-paying stocks or dividend-focused mutual funds offer a middle ground which can be a more reliable source of cash flow than relying on market appreciation.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
