Not all investments are created equal. Anyone who is retired will have different concerns and objectives with their investments than younger people who have just started saving for retirement. Often times, retired investors implement the same investing strategy as if they were still making a steady income. Investing in this manner when you’re retired, can have damaging results.
Mistake #1: Making Risky Investments
At a younger age, investors have the luxury of opening Individual Retirement Accounts (IRAs), which they can invest in for decades. The assets in these accounts can be placed in securities of varying risk, and typically the younger you are the more aggressive you are with risk. If you lose money in bad investments, there is still time to make up for it by switching to better-performing investments and by depositing more money. After retirement, the ability to make up for bad investments in greatly reduced.
Investing in risky investments is not generally advised after retirement because saved up money is needed for basic living expenses. The goal for retired investors is “capital preservation” and protecting your assets, which often means investing very little in stocks but moving your money into conservative, income producing, “safer” asset classes like bonds, CDs and government-backed treasuries.
Mistake #2: Locking In Too Much Money at Low Interest Rates
Some accounts require investors to lock their money without the ability to make withdrawals, leading to illiquidity. These accounts discourage withdrawals by charging a penalty if the accountholder withdraws more money within a year than is allowed in the contract. This fact can be disastrous for senior citizens who face unexpected medical and other expenses.
As people age, medical expenses generally go up. When these large expenses present themselves, money beyond a monthly income is needed and flexible investments can help in these situations. But if money is tied up in long term investments, withdrawing money can result in a loss of substantial capital due to fees and penalties.
The fact that the account may have a very low interest rate also exacerbates this problem. The retirees would have locked their money away for a too long a period of time for an interest rate that is not giving them a high enough return to make it worthwhile. This will mean that their monthly payments will also be very low, and they may not be receiving enough money to make ends meet every month. This would also increase the need to make extra withdrawals from long-term accounts. To avoid locking money in at too low rates, investors can invest in short-term CDs and use CD laddering is to take advantage of rising rates.
Mistake #3: Not Hedging Against Inflation
Some retirement accounts require a lump sum of money that will be used to give the accountholders retirement income for the rest of their lives. The account managers will determine how much the accountholders will receive in monthly payments based upon how much money was deposited and how long the accountholders are expected to live. These payments are guaranteed to be paid for the rest of the account holders’ lives.
The problem with some of these accounts is that the payments are fixed. As time goes by, the prices of everything naturally increases. Owners of the type of account described here are at a disadvantage, because their payments never increase with the rate of inflation which can mean an uncomfortable retirement. TIPS or Treasury Inflation-Protected Securities and gold are popular hedges against inflation.
People who are looking for an appropriate retirement account need to remember three things: Be conservative, invest with a high enough interest rate, and make sure inflation is taken into consideration when deciding on a retirement vehicle.
About the Author
Tal Baron writes for Currensee, a FOREX trading social network where investors can explore foreign currencies as new investment opportunities.