Losing money is the last thing any of us wants to do. Rather than risking your money on the stock market, you might just choose to park it in a savings account. Despite this, even high-yield savings accounts typically do not offer yields that can beat inflation. As a result, the money you earn from interest is unlikely to keep up with the rising cost of living. So, in short, you may actually lose money by playing too safe.
The good news? If you hope to retire someday, there are still plenty of low-risk, guaranteed-growth investments you can consider placing your savings.
1. Fixed Annuities
A fixed annuity is one of the most secure investments you can make. Annuities provide a guaranteed income, which no other financial product can match. Essentially, they guarantee that you’ll receive some money to supplement your Social Security benefits.
In a way, annuities are similar to private pensions. In order to fund an annuity, you pay premiums. As long as you leave your money alone, fixed annuities won’t ever drop below the initial amount you contributed. It’s not uncommon for annuities to have guarantee levels that are far higher than the minimum.
If you decide to annuitize your contract when you retire, your regular payouts will begin. In some cases, you can live off of these payouts for the rest of your life depending on the payout schedule you choose. You’ll also know the amount of each payout you receive.
Despite being low-risk, fixed annuities can also pay quite high rates. In some cases, the return can be 100 times higher than that of a high-interest savings account.
What’s another big advantage of fixed annuities? Their tax treatment. Until you withdraw from an annuity, you won’t be taxed on your earnings. Neither IRAs nor 401(k)s offer that benefit — except in an IRA or 401(k).
2. Your Retirement Account
A retirement account offers tax breaks and the potential to earn a lot more than a savings account, so you should consider it for your savings. Like investments in taxable brokerage accounts, retirement account funds can be invested. Short-term volatility may result from this. However, your investments are likely to gain value in the long term. Your wealth grows from these investment earnings without you having to set aside a ton of money each month.
The 401(k) plan offered by your company is a good place to start. You can contribute $22,500 to your 401(k), 403(b), and other retirement plans in 2023, up from $20,500 in 2022. The contribution limit for employees 50 and older has increased to $7,500 from $6,500 in 2022.
IRAs can also be used if your employer does not offer a 401(k). However, it has much lower contribution limits. IRA contribution limits will increase in 2023 to $6,500 ($7,500 if age 50 or older), up from $6,000 in 2022.
You may also have to choose whether to use tax-deferred or Roth retirement accounts.
Most 401(k)s and traditional IRAs are tax-deferred, which means your contributions reduce your taxable income this year, but you owe taxes on your distributions. These accounts are best if you think you’re in a higher tax bracket today than you’ll be in once you retire. By delaying taxes until you’re in a lower tax bracket, you’ll keep more of your savings.
Depending on your financial situation, you may want to use a tax-deferred or Roth retirement account. The contributions to 401(k)s and traditional IRAs reduce your taxable income this year, but you have to pay taxes on the distributions. When you retire, you will likely be in a lower tax bracket than you are today. You will keep more of your savings if you delay taxes until you are in a lower tax bracket.
3. Roth IRA
“A Roth IRA is a qualified retirement plan, just like a traditional IRA,” explains Jeff Rose in a previous Due article. They are taxed differently, which is the most noticeable difference. “Also, because Roth IRA investments are funded with after-tax dollars, they are not deductible,” he adds. Withdrawals, however, are deductible.
In addition, there are a lot of ways to fund a Roth IRA. These include:
Roth IRAs can be funded in several ways;
- Regular contributions
- Spousal IRA contributions
- Rollover contributions
“You must always contribute to a Roth IRA with cash, which includes checks and money orders,” Rose states. Real estate and stocks cannot be contributed. “Once contributions are made to a Roth IRA, there are other investment options such as mutual funds, stocks, bonds, ETFs, CDs, and money market funds.”
“Traditional and Roth IRAs will both limit contribution amounts to $6,000 for 2021 and 2022 and $7,000 for people over 50.”
“That’s all well and good. But, why am I such a big fan of Roth IRAs?”
The first advantage is that you can grow your money and withdraw it tax-free. The reason for that is that you used after-tax dollars to pay for it.
“Also, if you’re in financial trouble, you can easily access these funds,” he says. “I’m also big on the fact that there aren’t required minimum distributions and that you can contribute at any age.” In addition, Roth IRAs provide tax-free inheritances to your heirs.
4. Dividend Artiscrats
Dividend aristocrats are a good place to start if you are willing to take the risk of owning individual stocks. In order to qualify as a dividend aristocrat, a company must have paid and raised dividends consistently for at least 25 consecutive years. Dividend aristocrats typically represent the world’s most famous companies since they have mature businesses with consistent cash flow.
It is important to note that dividend aristocrats, although volatile, are typically more stable than the broader market. The reason? Customers are more likely to buy their well-known, name-brand products regardless of the economic climate. By definition, their income component always rises – providing a safe harbor for investors.
5. Health Savings Account (HSA)
If you plan to retire early, an HSA account would be a great way to save money for healthcare expenses.
In the first place, you’ll be able to deduct your contributions from your taxes. Upon reaching a certain threshold, your HSA contributions are investable. Moreover, HSA earnings and interest are tax-free.
As long as you use the money for health expenses, you can withdraw your contributions tax-free at any age. HSAs can also be viewed as traditional IRAs or 401ks by the IRS if you have money left over after age 65. Any expenses you incur can be deducted from the money, and it will be taxed as ordinary income.
However, an HSA can only be used by people enrolled in high-deductible health plans. So, you should take advantage of an HSA if you have a high-deductible plan.
6. A Taxable Brokerage Account
Most retirement accounts have a penalty for withdrawing money before you reach 59 1/2. This is one of their biggest drawbacks.
It applies to tax-deferred contributions, earnings, and Roth retirement account earnings. However, Roth contributions can be withdrawn penalty-free after five years, provided they’ve been in the account for five years or longer. Nonetheless, taxable brokerage accounts may be a better option than retirement accounts if you want to access your money before then without penalty.
Compared to retirement accounts, these have fewer restrictions. Unlike many 401(k) plans, you can contribute as much as you want to a taxable brokerage account and invest it however you want. In addition, you can choose which brokerage you want to work with, so you can control the fees you pay.
The downside? Unlike retirement accounts, you don’t get tax breaks. The income you earn from investments and contributions will be taxed. Long-term capital gains tax applies instead of income tax to investments held for more than a year before being sold.
7. Treasury Securities
There are a wide variety of investment options available when it comes to Treasury securities. Treasury bills, bonds, and notes are all part of this group. There is a debt obligation for each. In effect, you are lending money to the US Treasury when you purchase it. But, you will be repaid with interest by the Treasury later.
Because the US government backs Treasury securities with its “full faith and credit,” they are safe investments. If you’re curious, in the history of the US government, no debt obligation has ever been defaulted on.
Treasury Inflation-Protected Securities (TIPS) are a special category of Treasury securities. The TIPS interest rate is indexed to inflation. That means rates will rise during periods of inflation. As a result, your investment will retain its value. Deflation, however, will cause interest rates to drop.
Treasury bills are similar to CDs in terms of their advantages and disadvantages. Besides offering decent interest rates, they are safe. On the flip side, they also lock up your money. And, rates are usually lower than those offered by fixed annuities.
8. Real Estate
Generally speaking, saving money for retirement is easier when you invest in real estate.
In the first place, investment properties can provide you with steady passive income for the duration of your retirement. Second, landlords can deduct a significant amount of rental income under the current tax code.
Last but not least, if you profit from the sale of your primary residence, you won’t be subject to capital gains tax.
The sale of a single-family home can be excluded for up to $250,000 and the sale of a couple’s home can be excluded for up to $500,000. Just note that the home must have been owned and lived in for at least two of the previous five years to qualify for these exclusions.
To diversify your portfolio, you can invest in real estate with other investors. For real estate investments, crowdfunding platforms such as Fundrise and RealtyMogul exist. In other words, you have the opportunity to invest alongside hundreds of other investors in real estate projects and properties.
Where Shouldn’t You Park Your Retirement Savings
In case of emergencies or planned expenses, savings accounts are the best option. Apart from that, savings accounts do not earn much interest.
Some of the nation’s biggest banks offer a measly 0.01% interest rate on savings. Putting that in perspective, $100,000 worth of savings would earn you just $10 per year.
You might want to move extra savings from the bank into an annuity if you are over 65 or retired.
CDs and Money Markets
A CD, or Certificate of Deposit, is one of the safest ways to invest your money. The rate of return, however, is minimal — particularly during economic downturns.
Occasionally, a CD might be the right choice for you. A fixed annuity, however, will pay a higher interest rate.
Another safe way to earn interest is by opening a Money Market Account, or MMA. Although they tend to require a higher minimum balance, they tend to offer higher interest rates than savings accounts — but not always.
Banks use your money to make other investments or loans with these accounts. In return, they give you a bit of interest. The interest rates on money market accounts are similar to those on savings accounts.
Unless you need access to your savings in a short period of time, we wouldn’t recommend opening a CD or Money Market Account.
Other than banks, where should I keep my money?
When it comes to protecting your money, consider U.S. Government Securities. These are among the safest in the world, after all.
However, dividend aristocrats and real estate are good investments for those with a bit more risk tolerance.
How much retirement savings should you keep in low-risk investments?
Your financial goals and risk tolerance will determine how much risk you are willing to take.
A diversified portfolio is typically recommended by financial advisors. The result is a mixture of safe and risky investments. The upside of taking some risks is that you are able to earn more money. However, some money should always be invested in something less risky and safer.
Here are some common guidelines for choosing how much you should hold in riskier compared to safer savings options:
- An emergency fund of three to six months’ living expenses is usually recommended by financial planners. Keeping these funds liquid, as in a savings account, will allow you to access them whenever you want.
- It is possible to allocate the remainder of your retirement savings to a mix of assets that involve lower and higher risk.
- As time goes on, the mix may change. When you are further from retirement, you can be more aggressive with your investments. Keeping more in safe assets is a good idea when you’re nearing retirement.
For asset allocation, it is recommended that individuals hold a percentage of stocks, index funds, and other high-risk assets equal to 100 less than their age. A typical 55-year-old might allocate 45% of his or her portfolio to higher-risk investments. Invest the remaining funds in safer options, such as annuities.
It is important to remember that everyone’s situation is unique. To get personalized advice on investing, it’s a good idea to speak with a financial advisor before making any decisions.
What types of accounts are insured by the FDIC?
In addition to savings and checking accounts, FDIC insurance also covers money market accounts and certificates of deposit (CDs). Annuities, money market mutual funds, stocks, and bonds are not insured by the FDIC.
Where can I buy Treasury Bills?
It is possible to purchase U.S. Treasury bills through TreasuryDirect. An account must be opened and registration must be completed. As soon as you do, it will operate like a brokerage account that holds your bonds. T-bills are auctioned on a regular schedule.
What is the preferred place for millionaires to keep their money?
Millionaires store their money in stocks, bonds, private equity funds, and even cash. In order to invest wisely, wealthy people keep their money in a variety of places.