7 Alternatives to the Stock Market for Older Investors
The stock market is a great investment if you have a long time horizon. But should you continue to invest in stocks once you retire? When you start withdrawing from your retirement portfolio, you will be a lot more sensitive to stock market fluctuations. Most financial advisers recommend reducing stock market investments as you get older, but you don't want to just stick the money under the mattress either. Inflation will erode cash savings over the years, and we need to continue to invest. Here are seven investment alternatives to the stock market:
Annuities. There are many types of annuities, but the basic idea is that we pay an insurance company a lump sum in exchange for a guaranteed monthly payment for life. Annuity payouts are primarily tied to interest rates, so it's probably a good idea to wait until rates improve. You probably don't want to put all of your savings into an annuity because you really don't know how long you will live. If your pension and Social Security payments aren't enough to pay your minimal monthly expenses, then it's a good idea to buy an annuity to fill that gap.
Bonds. The classic alternative to the stock market is bonds. You can lend money to the government or a corporation and receive some interest. When the stock market goes south, investors turn to bonds as a good diversification from the stock market.
CDs. CDs are not very attractive at the moment because the yields are very low. However, the return is guaranteed and the risk is also very low. Building a CD ladder is a good way to guarantee stable returns. Once interest rates improve, it will be a good idea to invest in a long-term CD.
Real estate.Rental properties are a great way to generate some income, but they can be a lot of work. If you don't want to deal with tenants, then a property management company can be a huge help. If you really don't want to be a landlord, consider a real estate investment trust (REIT) instead. Investing in a REIT is much easier than owning rental properties, and the dividend payout is usually very good compared to other dividend stocks.
Peer-to-peer lending. Peer-to-peer lending is a great way to generate extra income. You lend money to individual borrowers and you'll be paid an interest rate. The good thing about peer-to-peer lending is that you can lend in $25 increments and diversify your lending portfolio. Some percentage of borrowers will default, but your lending portfolio should be able to handle some losses because the interest rate is so high. One big caveat is if we have a big recession and many people lose their jobs, then the default rate will skyrocket.
Long-term care insurance. The cost of long-term care can put a big dent into any retirement portfolio. A good nursing home can cost over $10,000 a month depending on where you live. Long-term care insurance can offset that cost. If your family has any history of Alzheimer's, dementia, or Parkinson's disease, long-term care insurance might be right for you. However, the cost of long-term care insurance is quite high, so if your family doesn't have any history of needing long-term care, it might be better to invest the money elsewhere.
Retirees shouldn't pull out of the stock market completely because it is still a great investment over the long term. Retirement can last over 30 years, and we need some growth in our retirement portfolio. However, retirees need to take a close look at their portfolio and ask themselves if they can handle the volatility. Most people think they can handle a big drop in the stock market, but when it happens, they often sell at the wrong time and lose out on the recovery. Choosing some alternative investments outside the stock market may bolster your finances during such an event.
See more on U.S News:
What History Predicts for Stocks in 2013
The Dark Secret to Beating the Markets
How to Tell if You Should Downsize in Retirement