I’m in my early 60s and have about $400,000 in savings. I tend to stick to bank money-market accounts and CDs, as I was scammed in the past. What’s the safest way for me to invest this money? —Maria
Your urge to play it safe is perfectly understandable. You already know from bitter experience that there are people out there who prey on inexperienced (or even experienced) investors by conning them outright or putting them into investments that may be inappropriate for their situation, and expensive to boot.
Such conduct aside, the financial markets in and of themselves can be scary, even when you’re limiting yourself to perfectly legitimate investments. Even though the stock market’s been going gangbusters since rebounding from the financial crisis some eight and a half years ago and has been hitting new records of late, at some point stock prices will tumble big time, as they have many times in the past. Bonds aren’t as volatile as stocks, but they too are somewhat vulnerable in that bond prices go down when interest rates go up (although as with stock setbacks, no one knows for sure when or how much bond yields will rise).
But the problem is that while your approach may be safe for now in that it protects you from con artists and market downturns, it can actually be somewhat risky in the long term.
The reason is that bank money-market accounts CDs alone might not provide the returns you’ll need after inflation and taxes to maintain your purchasing power throughout a post-career life that, as this longevity tool shows, could last well into your ’90s. Which means that to avoid having your standard of living slip over a long retirement, you really ought to consider investing at least some of your savings in a diversified portfolio of stock and bond funds.
Granted, the returns on such a portfolio may not be as generous as they were in the past. Indeed, a number of large investment firms are predicting that over the next decade or so, stock and bond returns could come in several percentage points a year lower than their historical averages. Still, investing in a portfolio of stock and bond funds—ideally, made up mostly or even entirely of low-fee index funds or ETFs—will dramatically improve your chances of earning returns that can stand up to inflation and taxes over the long term.
Just to be clear. I’m not suggesting that you abandon money-market accounts and CDs entirely. You’ll still want to invest enough in such secure vehicles to handle any outlays for emergencies and to cover, say, a year or two’s worth of living expenses beyond whatever Social Security and any pensions will cover.
And assuming you do decide to invest in a portfolio of stock and bond funds, you want to be sure you do so in a way that balances risk and return in a way you’re comfortable with. You want enough stocks in your portfolio to generate returns that can help you maintain an acceptable lifestyle and increase the chances that your savings will last as long as you do. But you don’t want to put so much of your dough in stocks that you’ll bail out of stocks whenever the market goes into one of its periodic convulsions. You want a mix of stocks and bonds that you’ll be able to stick with through good markets and bad.
Many retirees limit their stock holdings to somewhere between 40% and 60% of their overall portfolio. But others may decide to go with a higher percentage, or a lower one. You can get a sense of what blend of stocks and bonds may be right for you by completing Vanguard’s risk tolerance-asset allocation questionnaire. Besides suggesting a stocks-bonds mix based on your answers to questions related to how much volatility you can handle and how long your money will remain invested, this tool will also show you how different mixes of stocks and bonds have performed in different market conditions.
Once you’re ready to begin tapping your savings for income, you’ll also need to come up with a retirement income plan that will allow you to maintain your living standard as much as possible given the size of your nest egg without running too high a risk of outliving your savings.
If you feel you need help doing all this—and I can see why you might—you can always hire an adviser or go with an investment company that offers investing and planning advice, as do such well-known firms as Vanguard, T. Rowe Price and Fidelity. Given your past experience of being scammed, you’ll want to take extra care that you end up dealing with someone who’s both competent and trustworthy.
But the main point here is that while keeping all your savings in very low-risk but also low-returning investments might make you feel safe and secure now, you could be opening yourself up to the bigger risk that your nest egg may not be able to support you over the long term.