7 High-Return, Low-Risk Investments for Retirees

Highlights Sep.22,2022 03:53

A sound investment choice is one that produces more return than risk. Given the choice between two investments, each with a historical 20-year annualized average return of 7%, risk-averse investors should opt for the one with a lower standard deviation, or degree to which that investment has historically fluctuated around its average.

While high risk may produce potentially high returns, excessive risk-taking can be harmful.

This is especially true for retirees, who rely on consistent, perpetual withdrawals from their portfolios for income. In this case, prematurely running out of money is the worst-case scenario to avoid. Therefore, ensuring that portfolio volatility remains minimal and reducing the severity of is key. This must be balanced against the need to ensure that long-term returns outpace

Here are seven investment choices for retirees that have a good risk-return profile, especially when combined as part of a investment portfolio:

60/40 portfolio.
Bond ladders.
Options collar.
Low-volatility stocks.
Preferred stock.

60/40 Portfolio

A great hands-off choice for retirees is the 60/40 portfolio of stocks and Traditionally, this meant an allocation to U.S. stocks, and investment-grade corporate bonds.

Stocks drive strong returns during while bonds reduce volatility and provide protection during market crashes. Rebalancing periodically also helps investors buy the poor-performing asset at its lows and sell the better-performing one at its highs.

Historically, the 60/40 portfolio has offered a great blend of risk and return. For example, the Vanguard Balanced Index Fund Admiral Shares (ticker: has returned 6.33% annualized since its inception in 2000. However, the Achilles' heel of this strategy is high inflation plus which causes stocks and bonds to fall together. A combination of these factors in 2022 has caused the 60/40 portfolio to post its worst returns in over 20 years.

Bond Ladders

Retirees often hold a significant fixed-income allocation in Treasurys and investment-grade corporate bonds.

While bonds are generally lower risk than they are very susceptible to risk. When rates increase, bond yields rise, which causes their price to fall. This is especially true for longer-duration bonds.

A way to immunize your portfolio from interest rate risk is bond laddering. This involves buying multiple bonds of different maturities. As each bond matures, investors can redeem it for its face value, thus avoiding having to sell it early at a loss if rates are trending high. Having a bond ladder ensures more predictable which is crucial for retirees making scheduled withdrawals for income.

Certificates of Deposit (CDs)

A CD is a savings product sold by financial institutions that guarantees the principal plus a fixed annual interest rate for the duration of the investment.

When you invest money in a CD, you can pick a lock-up rate, which is the period during which you cannot redeem your investment. During this time, the CD will pay you an annual interest rate. At maturity, you receive your initial investment back.

Thanks to rising interest rates, CDs are paying competitive yields above regular savings or money market accounts in 2022, with some topping 2.7%. They are as risk-free as it gets, with your investment insured by the Federal Deposit Insurance Corp. Retirees can build a ladder of CDs of different maturities to ensure a steady stream of cash flows.

Options Collar

based strategies are best suited for retirees with a advanced financial knowledge, or the help of a well-versed in these instruments. Their primary use is to hedge risk, and they can be used in different ways to cap losses.

Think of them as portfolio insurance, which you pay a premium for. A popular strategy is the collar, which involves selling in increments of 100 shares of a company or index , while buying protective puts. The premium received by selling the covered call is a credit, which can be used to finance the premium debited by purchasing the put.

With this strategy, your losses and gains are capped, which can help reduce volatility in sideways-trading or An ETF that does this strategy for you is the Nationwide Nasdaq-100 Risk-Managed Income ETF.

Low-Volatility Stocks

The capital asset pricing model states that the expected future return of a stock is dependent on its systematic risk exposure, aka its market risk. In short, we can sum it up as more risk = more return. This is why, for example, investing in stocks generally produces a better long-term return than bonds.

However, there is a notable exception in the case of low-volatility stocks. These are stocks with a lower standard deviation and or sensitivity to a wider market's movements, than say, the

Historically, low-volatility stocks have outperformed the market, especially ones with excellent fundamentals. Therefore, retirees could lower the risk of their stock allocation by focusing on low-volatility stocks without reducing their expected returns markedly.

Series I Savings Bonds

I bonds are U.S. government debt securities indexed to inflation. Like most bonds, I bonds make semiannual interest payments to the holder. However, their yield is made up of two components: a fixed interest rate until maturity and a variable inflation-adjusted rate based on changes in the consumer price index.

The latter is calculated every May and November. Thanks to soaring inflation, it sits at 9.62%. I bonds are one of the few truly low-risk investments that guarantee both the safety of principal and inflation protection.

However, are limited to annual purchases of up to $10,000 when buying electronic I bonds, and an additional $5,000 if purchased using a tax refund. I bonds mature in 20 to 30 years, but investors can cash them in after five years without penalty. If cashed between one and five years, investors forfeit the prior three months of interest payments.

Preferred Stock

Preferred stock is a with both and fixed-income characteristics. Compared to common equity, preferred stocks have priority access to a company's assets in the event of a or

However, they retain no voting rights. In exchange though, preferred stock often pays a higher and more consistent . This can sometimes come with conditions that force the company to accrue dividend payments in arrears if not made on schedule.

The predictability of cash flows gives preferred stock a similar risk-return profile to bonds. Overall, preferred stock has a lower market risk compared to common stock but possesses higher interest rate risk similar to bonds. Investors can buy preferred stock directly or invest in a basket of them using ETFs like the iShares Preferred & Income Securities ETF.