Age-specific investment advice |
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CD terms vary by lender. Fees are likely to be less egregious with the CD, but again, the investor needs to be cautious about the actual terms on the CD. The SEC weighs in on this investment, too, in its publication, "Equity-Linked CDs."
3. Countdown to retirement
Conventional wisdom has you dialing down the risk in your portfolio. While it's true you don't have the years to rebuild your retirement portfolio after a substantial market decline, you still have to consider how your investments will keep pace with inflation-protecting purchasing power, as well as principal. You're likely to spend almost as much time in retirement as you will have spent in the workforce. Abandoning growth for safety of principal creates an issue down the road.
Treasury Inflation Protected Securities, or TIPS,
offer a fixed coupon payment plus a return based on the inflation
rate, as measured by the Consumer Price Index. The Treasury auctioned
a nine-year, nine-month TIPS (a reopening of the 10-year TIPS auctioned
in July) on Oct. 8 priced to yield 2.85 percent, plus inflation,
but there are 5-year and 20-year maturities auctioned as well. Because
they aren't tax deferred, TIPS work best in tax-advantaged retirement
accounts.
Series I savings bonds also offer inflation protection, along with a tax-deferral option not available on the TIPS, but currently the fixed-rate component of a Series I savings bond is zero percent. To learn more, see Bankrate's story on investments that outsmart inflation.
Also, learn more about annuities. Some inflation-indexed annuity products can deliver an inflation-adjusted income over your lifetime.
Annuities aren't right for everyone, but it's easy
to recommend against purchasing an annuity without getting an independent
second opinion on the decision. Consult a fee-only financial adviser.
4. Retirees
In today's market environment, retirees have the biggest concerns
about what is happening to their retirement portfolio. Typically,
at this stage, you are no longer contributing to retirement accounts
and are instead depending on distributions from those accounts to
meet your living expenses.
Throwing in the towel and liquidating stock and mutual fund positions for the safety of CDs and fixed-income annuities gets you away from the volatility of the markets, but eliminates the upside potential of stocks and bonds and increases the risk that the portfolio's yield doesn't keep pace with inflation.
It's a good idea to establish a fund of safe, liquid money market investments to meet your expected living expenses for the next two to five years. In general, the less worried you are about being able to meet these expenses, the fewer years' worth of expenses you'd want to have invested in these money market investments. With that part of the portfolio safely allocated, you can focus on investing the balance in a way that looks toward the twin goals of preserving principal while protecting purchasing power.
If your investment portfolio is in meltdown and you can't figure out how you're going to make ends meet, you may want to consider a Home Equity Conversion Mortgage, or HECM, also known as a reverse mortgage, as a financial backstop. These are a last-resort measure for getting funds, but I expect these mortgages to become more popular as boomers retire and explore this revenue source for retirement income.
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