How to Invest When Retired?

The stereotypical image of a pensioner does not involve talking about financial independence and investing. But in practice, many older people have savings. And in retirement, for the first time, they find time to think about how to manage money. In this text, we will talk about the features of investing with retirement.

Why would a retiree invest savings set aside for old age? Two main reasons: to ensure better safety of money, if the amount is already enough for all your future plans, or to increase capital through the return on investment, if the amount necessary for your goals for the second half of life is not yet in the account.

It is easier for young people to invest: they can take risks and invest in businesses, venture projects, trade currencies, and participate in initial public offerings. A whole life is ahead, and possible losses from investments can be easily compensated by newly earned money.

Elderly people who have gained life experience and accumulated capital are another matter. On the one hand, there is no desire to risk money much, and financial goal No. 1 is to keep savings. But, on the other hand, few will refuse to increase savings without exposing them to investment risk.

Many pensioners have savings “on the book” (current account or deposit). It seems that the amount is growing, thanks to the interest dripping on it. But in reality, you can buy less and less every year with the accumulated money: prices grow faster than your money in the bank. Therefore, the first rule of savings is to choose instruments with a return higher than inflation.

Savings are threatened not only by inflation, but also by specific risks associated with the currency and economy of the country where you live. In the event of a default, multi-year savings can “turn into a pumpkin” overnight. Diversifying your investments (distributing money between instruments that behave differently) will help protect against these risks.

You can buy bonds of American companies or the US Treasury, and in addition - gold, which protects against the loss of money in both local and global economic crises. But the bank account does not imply such diversification. In addition, the bank itself can "burst" if we are talking about a scenario of a serious default of the country's economy - but a portfolio of bonds of international issuers and gold cannot "burst" overnight.

Where to invest money for a pensioner who faces approximately the following financial tasks:

prevent savings from depreciating;
have passive income;
protect savings from a crisis.

An additional investment requirement, especially important for an elderly person, is the ability to quickly claim the invested money, preferably without significant loss of accumulated income. Not all assets have liquidity. Real estate, art, and low-yield bonds, for example, cannot be sold quickly and profitably.

At the same time, no one canceled diversification: no matter how old the investor is, the portfolio should be multidirectional. Another thing is that the proportions are different: the older the investor, the higher the share of risk-free instruments. If the owner of the capital at the same time also has a conservative investment profile, then his choice is a “safe haven”.
Investment options for retirees

From 90 to 100% of the capital must be invested in financial instruments, not only with the obligatory return of all funds, but also with a guaranteed income, albeit a fixed one:

deposits of reliable banks;
protective structural products;
government bonds.stock market;
precious metals;
other instruments

Separately from the named instruments, one can consider savings in non-state pension funds. These institutions ensure the formation of individual pension capital and, unlike banks, allow long-term investments in favor of PF participants. Plus, they do not require special training or additional education.

Deposits

Top deposits in banks, which experts consider to be the safest and most convenient way for pensioners. Among the advantages is the ability to terminate the agreement with the bank ahead of schedule without stopping interest accruals, transfer savings to inheritance, set up automatic deductions from pensions, etc.

It is better to choose a deposit with the possibility of debit transactions (replenishment, partial / full withdrawal of funds) and the preservation of income in case of early demand. The rate on such deposits is lower than the market average by 1-1.5%, but the opportunity to receive your money at any time and not lose the accumulated income is worth it.

Should pensioners be wary of their money? There are no reasons to worry about the elderly, because this is the most socially protected segment of the population. Plus, the banking system of developed countries is stable.
There are no significant risks. The only thing worth remembering is that if the bank is still declared bankrupt, the deposit is not broken ahead of schedule. Therefore, depositors will have to wait until the contract expires to withdraw funds.

Credit Card Interest

Cards that charge interest on the balance are also a good option.Many banks issue cards that can be used to pay for goods and services, and withdraw funds from ATMs. Interest is accrued on the card balance, which is transferred to the client on a monthly basis.

In different banks, the rate is different, approximately equal to deposits. Income can be spent, withdrawn in cash. Or leave it on the card, then the next bank payment will be more. Unlike deposits, cashing out money will be free of commission, plastic can be constantly replenished.

Minus – paid service, the interest on the balance may change, while the deposit has a fixed one. If the card is designed to generate income, it is undesirable to use it for purchases; you can constantly replenish it as far as possible. Risk – if it is lost or stolen, a person may lose all savings.

Protective Structural Products

Protective structural products are a ready-made complex investment, the structure of which may include deposits, precious metals, stocks, bonds, mutual funds, currency and other assets. It has a fixed term and brings a fixed yield, which is usually higher than bank deposits. A protective structural product guarantees a return on invested capital and is great for conservative investors.

Despite the apparent complexity, a structured product is a great way to profitably invest money for retirees, since it does not require special investor skills, is almost as simple as a regular deposit, has convenient terms (starting with 3 months) and at the same time is several percent more profitable than a deposit.

Life Insurance

Investments for pensioners include two more simple instruments – endowment and investment life insurance. They are popular in European countries. Before concluding a contract, you need to check the insurance company, if it goes bankrupt, then the money invested will not be returned. It is better to allocate a small amount for insurance and invest it annually. Retirees can choose one of the following options:

HOA (cumulative insurance) is a long-term program with a phased accumulation, funds are paid in installments. On average, the contract is concluded for 15 years.

ILI (investment insurance) is a medium-term program with a one-time investment of approximately 7 years.
In both cases, the income is up to 8%. The company invests the money received from customers in securities, protecting itself from risks.

Cons – the inability to return your money if the insurance company goes bankrupt, there is no choice of investment instruments to increase income.

Advantages – in addition to making a profit, a person insures life, and policy contributions are not subject to division, seizure or confiscation.

Bonds

As for domestic government bonds, this is already more difficult for older people, as it requires better digital literacy. Of course, relatives can help, suggest and teach, advise which bond is better to buy.Government bonds are a less risky option than common stocks. But not as costly as, for example, investing in real estate.

Two qualities are important for a pension portfolio: reliability and predictability.

Reliability implies that the investment will be safe for many years.

Predictability is needed to know for sure that by the time of retirement, there will be enough funds in the portfolio to ensure a comfortable lifestyle.

Bonds are great for this purpose. You can choose long-term securities of highly reliable issuers, which will allow you to both protect the portfolio and estimate in advance how much money will be in the account at the time of retirement.

It is bonds that are preferred by pension funds, placing most of their funds in government securities and bonds of corporate borrowers with high ratings.

Despite the apparent complexity, a structured product is a great way to profitably invest money for retirees, since it does not require special investor skills, is almost as simple as a regular deposit, has convenient terms (starting from 3 months) and at the same time is several percent more profitable than a deposit.

As for domestic government bonds, this is already more difficult for older people, as it requires better digital literacy. Of course, relatives can help, suggest and teach, and advise which bond is better to buy. Government bonds are a less risky option than common stocks. But not as costly as, for example, investing in real estate.

Two qualities are important for a pension portfolio: reliability and predictability.

Reliability implies that the investment will be safe for many years.
Predictability is needed to know for sure that by the time of retirement, there will be enough funds in the portfolio to ensure a comfortable lifestyle.

It is bonds that are preferred by pension funds, placing most of their funds in government securities and bonds of corporate borrowers with high ratings.

It is important to take into account such a factor as liquidity. Liquidity is the ability to sell or buy a bond within a reasonable timeframe at a price close to the market price. This is important so that regular contributions can replenish the portfolio. In this case, you need to cut off the securities, which are not actually traded. You can determine them by analyzing the history of transactions by day, or simply by looking into the order book and seeing an emptiness there or a couple of lonely orders.

Stock Market

With the stock market, the situation is similar: no one forbids investing in stocks, but there are few pensioners who can learn the nuances of such investment. If a person is ready for something new, wants to receive passive income and has a sufficient initial amount, it is recommended to seek help from specialists who will find the best use for other people's finances.

Retirees, like everyone else, may have dreams that require more money than they managed to save: to go on a trip, to have a wedding for their children, or to give their grandson a degree in a prestigious university, and finally, to leave behind a legacy. Investing in stocks can help get closer to their realization.

Shares are a riskier instrument than bonds, but also more profitable: in good times, an investor can receive tens of percent of profit per year.

The risk and depth of portfolio drawdowns, however, can be managed – again, through diversification. Investing in broad market stocks in ETFs, such as FXWO (share fund of the world's top companies), FXDM (share fund of developed countries, except for the United States), protects the investor from the risk of investing in the “wrong company”, perhaps typical for beginners.

ETFs do not select stocks on the basis of someone's expectations or forecasts, but strictly follow the stock index with their composition – that is, within stock ETFs, there are always "winning" companies, those that cost the most. When a company leaves the index, it also leaves the fund, and another strong player takes its place. And since the fund contains shares of not one or two companies – but tens and hundreds – the elimination of one "loser" does not lead to the loss of all savings, as in the case of buying shares one at a time.
Investments in precious metals

A good way for pensioners to invest is to buy expensive metals (gold, silver, palladium, platinum) in the form of coins, bars or open an unallocated metal account. Precious metals will never depreciate completely; in recent years, their price has been steadily growing.
There is only one minus – this is a long-term investment, you won’t be able to make money quickly. It is recommended to choose this option if they plan to receive a profit in at least 5 years.

Life Cycle Funds (Target Funds)

Perhaps the most interesting option for an investor is the Target Retirement Fund (TRF) – funds with a target retirement date. TRF can be bought on the exchange like ordinary securities (stocks, bonds, ETFs).

These mutual funds are specifically designed to save money for retirement. They are arranged as follows: the investor determines the year when he retires; depending on how far this year is, the share between stocks and bonds is determined in the fund: the longer the investment period, the more stocks, but when the time comes to receive a pension, the balance gradually shifts to bonds, and then to the most conservative government short-term obligations.

The portfolio is diversified as much as possible, which reduces the risk of choosing a single unsuccessful company and is periodically rebalanced in accordance with its own rules. The advantage of this approach is that the future pensioner does not need to think about the correctness of investments, the selection of papers and other nuances. All that is required of him is to choose the right fund (with a target retirement date) and buy new TRF shares every month.

The only negative is that the value of the fund can fluctuate greatly during moments of turbulence, when retirement is still far enough away (that is, when it has a large share of shares). This is not a problem for those who understand that volatility eventually ceases to play a decisive role in the likelihood of achieving the desired result; but for those who do not understand how financial markets work, these can be uncomfortable.

Another disadvantage (a consequence of advantages) is that the fund is highly diversified and it is not worth expecting super-high income from it, reactions to reporting or other things.
The logic of a life cycle fund is based on the following facts: business brings the highest real return over a long period of time. It is most profitable to be the owner of the business (and not a creditor), that is, to own shares. Despite the fact that within a year or two or three, and sometimes even five, their prices can both rise sharply and fall sharply, for long periods of time it is most profitable to be the owner of a business, and shares show the maximum real (that is, minus inflation) profitability.

At the same time, upon retirement, a person can no longer afford a strong reduction in capital, since he may not have the time when he returns to the previous level. Therefore, the share of stocks is gradually decreasing in favor of bonds, which are the second most profitable instruments after stocks; and since the redemption price of bonds is known in advance, fluctuations in them are not so massive, and even after strong crises, prices quickly return to reasonable values.

How to Assemble a Fund on Your Own?

Understanding the logic described above, in principle, enables the investor to assemble a fund on his own, which will show results comparable to a life cycle fund. If desired, the parameters of your portfolio can be adjusted in such a way that its volatility does not cause discomfort, sacrificing part of the return.

In other words, in order to save for retirement, an investor needs to calculate the investment horizon, determine his own resistance to possible drawdowns during market shocks, and, based on the result of these two parameters, build a portfolio of two asset classes – stocks and bonds. As a rule, here the question arises, which ones specifically.

Despite the apparent complexity, the answer is quite simple: these are exchange-traded funds (ETFs) for broad indices. For those who do not want to understand the intricacies at all, you can choose ETFs for the US market and for the whole world. Such an approach will completely eliminate the risk of making a mistake with one company and will be tantamount to betting on the economy as a whole, which, as you know, although it is cyclical, has been growing all the time over the past few hundred years.

An exchange-traded fund is similar to a mutual fund, but has a number of parameters that make it more preferable for inexperienced investors. Here it is important to make a reservation that we mean ETFs on a broad index, and not highly specialized funds with leverage on synthetic derivatives indices.

Firstly, the ETF tracks the index, and there is no risk that the manager will make a mistake or change, or the management will give him any instructions that are at odds with the interests of the shareholders. This, on the one hand, reduces the possibility of beating the market, on the other hand, it minimizes the likelihood of losing to it, which may be more important for long-term investment in old age.

Secondly, as a rule, such funds are cheaper, sometimes significantly, which, other things being equal, in the long run can result in tens, and in some cases hundreds of percent.

Third, ETFs are publicly traded, making them easy to buy and sell (although some studies point to this as a drawback because investors are more likely to be tempted to make a decision with a single click rather than driving to the management company's office).

Fourth, the ETF world is very wide, and if desired, an investor can choose those classes that would be difficult to buy using the standard line and expertise, for example, an Indian, Australian or Taiwan stock fund.

Opening Your Online Business

You don't need to invest a lot of money to start your own business. The main thing is to find an idea. For example, now demanded directions are cultivation of flowers, decoration of a garden plot, proper nutrition, a healthy lifestyle. But this is not passive income, this is an investment of free time. Online projects are in demand now:
Website development. Ready ones can be sold or earned by placing ads. But a lot of time and effort will be required to promote sites.

Attracting subscribers. Many companies pay for new customers. You can combine business with pleasure – communication and part-time work.

Blog. A page or channel is created on YouTube, Instagram. Profit comes from the monetization of videos or advertisers.

An online business needs investments, but minimal, most projects can be opened without any start-up capital at all. The downside is a lot of competition.

Investment Portfolio for Pensioners

In order to profitably invest money, it makes sense for pensioners with sufficient capital to form an investment portfolio. It can consist of two or three investment instruments, or be more diversified. The advantage of this approach is not only in capital protection, but also in the ability to include a small proportion of high-risk assets in the portfolio – stocks and derivative financial instruments (futures, options).

They can be 5-10% of the portfolio, which does not pose a threat to the fixed capital, and with a favorable outcome, it will make good money. For the rest of the portfolio, you can choose the deposits, structured products and bonds already mentioned above.They can be kept company by savings in foreign currency and precious metals.

It is worth remembering that in practice, prices for different goods grow unevenly, and with official inflation of 6%, the cost of your food basket or a trip to your relatives can grow by tens of percent in the same year. Therefore, it is important to analyze costs and adjust the strategy, taking into account the speed with which your savings are being eaten away.

Tips for Retirees on How to Invest Without Risk

Often, pensioners are the most vulnerable to financial scammers: wanting to increase their savings, they may not have the necessary knowledge and skills, do not understand the principles of operation of financial structures, and, moreover, are often too gullible.

There may also be a lack of trust in relatives who could be consulted about the safety of a particular decision. Another problem is the lack of skills to work with reliable sources where you can check the information.

What is our advice to retirees?

Don't chase high returns. All experts point out that the surest indicator of fraud is a guarantee of high profits with minimal risks. The higher the promised return, the higher the risk of losing everything.
To start investing, you need to choose a reliable company that must have a license. It is more correct to choose a firm in developed countries, where regulation is more reliable, experts advise.
If a company takes money into management, it must have a document describing its investment strategies – an investment declaration, a memorandum. At the same time, the financial company is obliged to warn about the risks associated with investments. Fraudsters deliberately "forget" about it.

Summing up, we note that for pensioners who do not have a rich experience in private investment, it is most profitable to invest money in order to securely preserve it and receive a stable, albeit low, but stable income. Stocks, stock mutual funds, currency speculation are best left to younger or more experienced investors.

If you are an investor of pre-retirement or retirement age (55 years or more), then you have little time to invest. Investors of this age range can conditionally be classified as conservative. It is better for them to pledge at least ten years for investments and use conservative instruments. Such investors do not need to sell their assets, they should be constantly increased. Here it is worth investing in real estate, deposits, as well as shares of stable companies.