Everyone has different risk levels they are comfortable with when investing. Some are willing to put all the odds in their favor and like to see if they get a greater return from an up-and-coming industry or company. Others are way less adventurous, so they prefer to invest in a steadier account that will offer consistency with returns. As you begin to think about how you want to prepare for retirement, you should know your risk tolerance.
Your risk tolerance will determine what investments you will or won’t include in your retirement portfolio. Regardless of if you’re more open to being brave with your money, you should always have some low-risk investments. If you aren’t sure what low-risk investing means or how it can influence your financial stability, stick around to learn how it can benefit you.
What Defines a Low-Risk Investment, and Why Is It Suitable for Retirement Planning?
A low-risk investment is an investment that doesn’t have as high risk or potential returns as investments like stocks, cryptocurrencies, startups, and trading. While these investments depend on an unknown outcome and chance, low-risk investing offers more certainty about how you will grow. This type of investing is essential for retirement planning because it provides a stable means of income and consistent growth of your wealth. No matter your investments, there will always be risks. Still, this reality should not prevent you from being educated and intentional with your money. They are also essential to pursue sooner rather than later so your savings can have adequate time to earn dividends and build as you contribute to your accounts.
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What Are Some Examples of Low-Risk Investments?
Since low-risk investments are more dependable than high-risk investments, they are often categorized as savings, bonds, and certificates. Here are some standard accounts that could be useful for you to include in your retirement plan.
1. Term Share Certificates
Having a fixed term for an extended amount of time (several months to years) allows your money to be out of reach from your discretionary spending. Instead of having your money in an easily accessible account, you have the accountability to leave your money alone. Certificates typically have higher interest rates, which could be an excellent option for your long-term goals.
2. High-Yield Savings Accounts
Similar to a certificate, when you open this account, you will also receive an annual percentage yield of interest. High-yield savings accounts are a good choice if you want access to your money without it being locked in for a long time. There are also not as many requirements to manage this type of account, and you don’t have to worry about penalties when you need your money.
3. Bonds
Bonds are investments where you provide a loan to a borrower, and they pay you interest as compensation until you receive the loan back in full. These investments can be through corporations, municipalities, or government agencies. If you’re looking for a long-term commitment to build wealth, a bond might fit your plan well. Two types of bonds that could serve you for your retirement savings are:
- Municipal Bonds. These government bonds allow investors to loan money to develop highways, schools, hospitals, and other public entities.
- High-Quality Corporate Bonds. Instead of investing through a government entity, private companies offer these bonds. Don’t worry—these aren’t businesses trying to be world-renowned innovators in a new technology or research experiment. They are significant companies that have accomplished steady business endeavors for decades.
4. Money Market Funds
A money market fund is a type of mutual fund, which are multiple investments you fund with others. While typical mutual funds consist of stocks, bonds, and real estate, money market funds are a combination of certificates, treasury bills, short-term municipal securities, and commercial paper. Using this investment account for your retirement is a great tool for diversification, and they offer higher returns since you have a variety of investments in one.
These are just some of the investments you can find and think about for your retirement. While these accounts are considered low-risk, you should never forget that the National Credit Union Administration does not insure your investments.
How Can You Assess the Performance of Low-Risk Investments?
When choosing your investment options, it’s essential to understand how they work and whether they are on track to meet your financial goals. Here is a checklist for what to assess before and during your investing period.
- Consistency – How often will you be getting returns?
- Final Return– How much are you projected to receive? Are you staying on track?
- Inflation– Depending on your investments, they may be affected by inflation. Consider how much this will impact your final return.
- Market History– If possible, look at the history of the organization or company where you’re investing. How has their story played out in the past? Can you learn anything about how their actions could affect your investments?
- Timeline – How long does the investment last? Are there rules or requirements for withdrawals?
- Rate Changes– What is the current annual percentage yield (APY) on the account? Will this yield change often?
What Are Common Pitfalls to Avoid with Low-Risk Investing?
While low-risk investing is typically a safer option for your money, there are some things you shouldn’t overlook in your portfolio.
Not Diversifying
Don’t put all your eggs in one basket by choosing just one type of investment. It’s crucial to diversify among your low-risk investments, such as a bond, high-yield savings account, and money market fund.
Using Only Low-Risk Investments
We understand how putting your hard-earned money on the line can be daunting. However, if you want your wealth to flourish, you’ll need to be open to taking a little more risk. Although there are more unknowns with high-risk investments like stocks, it doesn’t mean any kind of return is impossible. Plus, there are varying risks involved with stocks and other assets, so you can still choose a less risky option for retirement.
Starting Too Late
This is why we repeatedly emphasize the importance of beginning investing early. Since low-risk investments need time to produce a fruitful return, it is essential that you start as soon as possible. If you wait too long, you could miss out on years of earned interest and diligent contributions that could significantly impact your retirement income.
Making Rash Decisions
If the market takes an unexpected dip, your first response should not be to act brashly. Your investment may be faltering at the moment, but you need to give it time and patience. That moment of disappointment could switch just as quickly, and your investment could take off in worth.
Lack of Intentionality
When investing, one of the most essential character traits is being intentional about keeping up with how your accounts are doing, so you can know if any changes need to be made. Not keeping up with what is or isn’t working could be detrimental to your goals without the proper supervision.
Prepare for Your Retirement with Leaders Credit Union
Are you ready to dive into the world of investing so you can prepare for retirement? Knowing which accounts are correct for you is foundational for managing your portfolio and reaching your goals. At Leaders, we want to help you achieve those dreams you have, and we want to make sure the process is as smooth as possible. See our free Deep Dive into Investments Guide or contact one of our Investment Champions to learn more about investing.
