The choices you make regarding your retirement investments will affect how the last (and hopefully best) decades of your life play out. Choose the wrong investments, and you'll face serious income shortages as a senior -- and in a worst-case scenario, you may run out of money and rely entirely on Social Security, which only pays the average beneficiary about $16,000 a year.
The first and most important step in saving for retirement is investing as aggressively and consistently as you can. That said, if you make poor investing choices, the money you've saved could vanish into thin air. For most investors, investing retirement savings in any of the assets below is a bad idea.
There's nothing wrong with collecting stamps, coins, or anything else as a hobby, but if you're basing your financial security on collectibles, you'll likely be disappointed. The value of any given collectible tends to bounce up and down over time in an unpredictable manner, so your collection may dive in value just when you need to sell something for income. Many collectibles turn out to be completely worthless over the long term, leaving you in a potentially dire situation. For example, paintings tend to rise and fall in value based on how fashionable the artist is and how trendy their style has become -- factors that are impossible to predict in advance. What's more, collectibles suffer from a major tax handicap: The capital gains rate for collectibles is a flat 28%, far higher than the rates for other types of investments.
A commodity is a basic good or service that's interchangeable with similar goods and services. For example, one barrel of crude oil is just as good as another, no matter who supplies it. The same goes for gold, which is probably the most popular commodity among investors today.
While commodities may have a place in a non-retirement portfolio, they're far too risky as a retirement investment. Commodities respond not only to the standard market pressures such as interest rates, but also separate factors like national and international laws, taxes, and policies to a far greater extent than stocks do (depending on the type of commodity). Take oil, for example: Oil prices fluctuate according to supply and demand, the political situation in the Middle East, environmental concerns about drilling and fracking, and a whole slew of taxes, including tariffs. Plus, it's a lot harder to store barrels of oil for a rise in prices than it is to hang on to a few stock certificates (although the barrels might make for quite the conversation starter).
While fixed annuities may be a good choice for some retirees, variable annuities are problematic. Unlike those of fixed annuities, variable annuities' payments fluctuate over time (hence the name). That makes them a much less reliable source of income than a fixed annuity. And variable annuities, being more complicated products, have way higher fees and other expenses. In most cases, investors can get significantly better returns by making investments through a broker, rather than getting them through a variable annuity.
A brand-new small business may seem like an attractive retirement investment, but steer clear of these start-ups. A new business is inherently riskier than a well-established one (and even established businesses can be pretty darn risky). The fact that Warren Buffett shuns start-ups should be warning enough that they're far too risky for retirees.
If you feel like a business would be a good addition to your retirement portfolio, choose an established one and make sure it's in an industry that you know inside and out. For example, if you have decades of experience working as a mechanic, then part-ownership in a car repair shop might be a reasonable choice. But for most retirees, the best way to buy into a business is to buy its stock on a public exchange.
So what should you buy?
The bulk of any retirement portfolio is best kept in stocks and bonds, with perhaps a small percentage in cash equivalents such as CDs. If you want to diversify beyond this level, limit your alternative investments to a single-digit percentage of your entire portfolio. For example, if you want to put some of your money into real estate, you could do so by shifting some of your stock money into REITs. That allows you to enjoy the benefits of real estate ownership without having to pony up a huge sum of money to buy an actual property. Similarly, rather than putting your retirement money into a commodity or (Heaven forbid) a futures contract, you might make a small investment in a commodities ETF. And remember: Keep these alternative investments limited to less than 10% of your entire portfolio. Any more than that, and your retirement balances will become far too volatile.
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