Popular Low-Risk Investments for Retirees

Many retirees seek to preserve their savings while generating steady income, which leads them to consider the safest investments for retirement. Options such as certificates of deposit (CDs), Treasury securities, annuities and certain bond funds can provide predictable returns with relatively low exposure to market swings. However, slightly riskier assets like dividend stocks and preferred stocks may also have a place in a retiree’s portfolio. While no investment is entirely free of risk, these choices are often favored by those looking to balance income needs with capital preservation during their retirement years.

A financial advisor can guide you in selecting investments for your specific retirement needs.

1. Bonds

Bonds are fixed-income securities that pay interest to the bondholder at regular intervals. Issued by governments and corporations, they are often considered a safe investment. Bonds can offer income stability through regular interest payments and therefore provide a predictable income stream to cover living expenses. Bonds also come with a lower risk of principal loss compared to stocks.

U.S. Treasury securities, including Treasury bills, notes and bonds, are widely viewed as among the safest fixed-income investments available, backed by the full faith and credit of the U.S. government.

Diversification strategies for retirement portfolios often include bonds as a stabilizing asset that aims to reduce overall risk. With their fixed interest rates and maturity dates, bonds provide predictability and ease of financial planning, and they can help preserve capital. Retirees may also choose bond funds, which offer diversification across many bond issuers and maturities, providing steady income and simplifying portfolio management.

Bonds are generally less volatile than stocks and can provide a steady source of interest income, making them appealing to retirees seeking stability. Many bonds can also be sold before maturity if cash is needed, although selling early may result in a loss if market prices have declined.

It’s important to consider that the safety of bonds can vary based on the issuer’s creditworthiness and how sensitive they are to interest rate changes. Government bonds, particularly from financially stable countries, are often considered the safest. Corporate bonds may carry more risk, depending on the financial health of the issuing company. Generally, bonds with longer maturities and lower coupon rates are more sensitive to interest rate changes than bonds with shorter maturities or higher coupon rates, all else being equal.

Retirees should assess their risk tolerance, investment goals and time horizon before investing.

2. Certificates of Deposit (CDs)

Certificates of deposit (CDs) are time-bound deposits held with banks that offer a fixed interest rate. CDs offer income stability through fixed interest rates and predictable maturity dates. Retirees can rely on regular interest payments, which can help cover living expenses and maintain financial stability.

CDs also offer a high degree of principal protection. Deposits held at FDIC-insured banks are generally insured up to $250,000 per depositor, per bank, per ownership category, including accrued interest.

The FDIC generally insures eligible deposits up to $250,000 per depositor, per insured bank, per ownership category. Coverage includes accrued interest and is shared with other deposits in the same ownership category at that bank.

Like bonds, CDs offer capital preservation and are generally less volatile than stocks, making them a suitable option for risk-averse retirees looking to safeguard their savings.

However, CDs are less liquid than investments like bonds, which can be traded on a secondary market. CDs may also offer lower returns than other investments, such as stocks or certain bonds. This exposes CDs to purchasing power risk, especially if inflation outpaces the account’s APY.

Retirees should carefully consider their financial goals and risk tolerance when incorporating CDs into their retirement strategy, keeping in mind that they may trade higher returns for increased security and stability in their investment portfolio.

3. Dividend-Paying Stocks

A couple developing a strategy to boost their nest egg with low-risk retirement investments.

Dividend-paying stocks are shares in established companies that distribute part of their profits to shareholders. These stocks can be a valuable component of a retiree’s investment portfolio for several reasons. They offer a consistent income stream through regular dividend payments, helping retirees cover their living expenses while potentially enjoying income growth over time. These stocks also have the potential for capital appreciation, which can help retirees keep pace with inflation and potentially grow their wealth.

Including dividend-paying stocks in a retirement portfolio could also add diversification, spread risk and enhance overall returns. And some tax advantages may be available for qualified dividend income, further benefiting retirees.

However, it’s important to recognize that dividend-paying stocks come with greater volatility and risk when compared with bonds and certificates of deposit. Their value can fluctuate with the stock market and there is no guarantee of continued dividend payments. Therefore, you should carefully consider the financial health and track record of a company before investing.

4. Preferred Stock

Preferred stocks can provide retirees with regular dividend income, often at higher yields than common stocks. However, dividend payments aren’t guaranteed, and preferred shares can lose value as interest rates or market conditions change.

In the event of a company’s liquidation, preferred shareholders receive priority over common shareholders when assets are distributed. However, bondholders and other creditors must be paid first. Including preferred stocks in a portfolio can also contribute to diversification, helping to spread risk and potentially improve overall returns.

However, preferred stocks generally offer less potential for capital appreciation than common stocks. While preferred stock dividends are typically more predictable than common stock dividends, they aren’t guaranteed. Companies facing financial difficulties may suspend or reduce dividend payments, whereas bond interest payments are contractual obligations.

5. Annuities

Annuities are insurance contracts that can provide guaranteed retirement income, depending on the contract’s terms and the financial strength of the issuing insurer. They also offer tax-deferred growth, although purchasing an annuity within a tax-advantaged retirement account generally provides no additional tax-deferral benefit.

Additionally, some annuities offer guaranteed income options and flexible payout choices, allowing retirees to tailor their investments to their specific needs and preferences. Nevertheless, annuities come with certain drawbacks, including fees and expenses that can reduce overall returns and potential surrender charges for early withdrawals.

Furthermore, annuities may limit liquidity and flexibility, as they often tie up a significant portion of assets. Retirees should thoroughly evaluate their financial goals, risk tolerance and the terms of the annuity contract before making a commitment.

6. Money Market Funds and Accounts

For retirees who want safety without giving up quick access to their money, money market funds and money market deposit accounts fill a specific role that neither bonds nor CDs quite cover.

Money market funds generally allow investors to access their money without committing it for a fixed period. They invest in short-term debt instruments, such as Treasury bills and commercial paper, to provide liquidity and modest income while seeking to maintain a stable share price. However, investors can still lose money.

A money market deposit account works much like a traditional savings account and generally qualifies for the same FDIC insurance coverage as a CD when held at an insured bank.

The defining feature here is flexibility. There’s no fixed term to wait out and no penalty for pulling money out early, which makes these accounts a practical home for cash a retiree might need on short notice, separate from money earmarked for longer-term income generation.

Unlike fixed-rate CDs, money market funds and deposit accounts generally offer variable yields that change with market interest rates. Their flexibility can make them useful for emergency savings or short-term expenses, though retirees should understand the differences in risk and deposit insurance coverage.

7. Treasury Inflation-Protected Securities (TIPS)

One risk retirees face with traditional fixed-rate investments is inflation. A bond or CD that locks in an interest rate today may lose purchasing power if inflation outpaces its returns over time. For retirees planning to live on their savings for several decades, investments that offer explicit inflation protection may be worth considering.

TIPS were built specifically to close that gap. Issued by the U.S. Treasury, these bonds tie their underlying value to the Consumer Price Index rather than holding it flat. When inflation rises, the bond’s underlying value climbs with it. Because interest is calculated based on that adjusted amount rather than the original purchase price, the actual dollar payments a holder receives also grow during inflationary stretches, not just at maturity.

Credit risk is essentially a non-issue here, since these are backed by the same government guarantee as any other Treasury security. TIPS generally offer lower stated interest rates than comparable conventional Treasury securities, but their inflation adjustments also contribute to investors’ returns. Like other bonds, TIPS can lose value if sold before maturity, particularly when market interest rates rise.

Interest payments from TIPS are subject to federal income tax but exempt from state and local income taxes. Inflation-related increases in principal are also generally taxable at the federal level in the year they occur, even though investors don’t receive that additional principal until maturity.

Bottom Line

A couple researching low-risk retirement investments.

Understanding the benefits and risks of these investments can help you build a retirement portfolio that balances income, stability and long-term growth. However, as there is no one-size-fits-all solution, the right balance will depend on your unique circumstances and goals.

Tips for Retirement Planning

A financial advisor can help you make a retirement plan, from determining how much you need to live the retirement you want and then help you choose the right investments to get you there. Once you hit retirement, a financial advisor can help you maintain the amount you need in your retirement fund. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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