Common investing advice is to shift toward “safe” assets as retirement approaches. Bonds instead of stocks. More cash. Steady income over growth.
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But in retirement, the definition of safe can change. When your portfolio must generate income, hedge inflation and withstand market volatility, some traditionally conservative investments can introduce new risks. Financial advisors explain which formerly safe investments you may want to reconsider.
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Long-Term Bonds
Bonds are often grouped into one conservative bucket, but not all bonds behave the same, according to Erik Goodge, CFP, owner of uVest Advisory. “Long-term bonds have the added risk of being very sensitive to changes in interest rates along the yield curve. This is called duration risk.”
He explained that retirees who may need to tap their portfolio distributions sooner could be taking on unnecessary uncertainty through bonds. “If interest rates rise, long term bonds will fall in price much more than short-term bonds. The inverse is also true of course but it adds uncertainty to the portfolio,” he said.
Investors often misunderstand that bond values, even those of U.S. government bonds, can be volatile with market interest rates changes, according to Robert R. Johnson, Ph.D., a financial advisor and professor of finance at the Heider College of Business at Creighton University.
Bonds may reduce stock volatility, but they can magnify interest rate risk just when retirees need stability.
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Dividend Stocks (Sometimes)
Dividend-paying stocks are frequently marketed as a retirement income solution because they can be tax-efficient and historically reliable. However, Goodge cautioned that dividend payments are never guaranteed. “Companies retain the right to lower, pause or even stop dividend payments altogether and this has happened frequently in the past,” he said.
Johnson also warned against “chasing yield.” Some stocks with very large dividend yields are likely to have unsustainable dividend levels, he explained. He encouraged diversification.
Cash, CDs and Money Market Accounts
Cash-heavy portfolios feel safe because your money is liquid. But they come with other problems.
Goodge said concentrating heavily in certificates of deposit (CDs) or money market funds exposes retirees to “reinvestment risk,” meaning future yields may be lower.
Johnson explained that low-yielding assets may protect against short-term volatility but increase “shortfall risk,” or the probability that your portfolio’s value will fall below what is needed or desired.
Over a retirement that may last 30 years, a portfolio that fails to grow can lose purchasing power.
Sequence of Returns Risk
Even a well-constructed portfolio can fail if market losses occur at the wrong time, Johnson explained. He called the five years before retirement the “retirement red zone” in which a large downturn in the equity markets can devastatingly impact a retiree’s standard of living.
Goodge added that this risk is especially acute early in retirement and often requires adjusting withdrawals or maintaining a bond ladder.
Warning Signs a Portfolio Is Too Conservative
While some investments may not be right for retirees, both experts agree that one major red flag is little to no equity exposure.
Goodge said that equities serve as an inflation hedge and growth engine. Retirees may not need to accumulate wealth, but they still need portfolios that can sustain spending for decades.
In retirement, playing it safe means managing trade-offs. Strive for enough stability to fund near-term needs and enough growth to preserve independence over time.
Editor’s note: This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
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This article originally appeared on GOBankingRates.com: Financial Advisors: 5 ‘Safe’ Investments That Might Not Be Safe for Retirees
