When you retire, you inherently have less flexibility with your budget than you did during your working years. This is because when the going gets tough, you can’t simply ask for a raise or work more overtime to increase your income. It’s true that if you, like most retirees, live on a combination of Social Security and personal investment income, your income could grow at the pace of inflation in retirement.
However, if you encounter an unexpected expense or portfolio loss, it may be difficult to recover quickly. This is why it’s important to avoid overly expensive or risky investments for your retirement. Here are some of the things that raise red flags for most retirees.
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High cost mutual funds and ETFs
The good news for investors over the past few decades is that the cost of most investments has fallen significantly. Zero-commission trading in stocks and ETFs is now the norm rather than the exception, and the proliferation of low-cost, no-load mutual funds means any investor can buy high-quality investments at almost no cost. .
Unfortunately, there are still funds and ETFs that have high costs. These not only reduce investment returns, but are unnecessary out-of-pocket costs for retirees living on a tight budget. If you want to make the most of the money you have in retirement, be sure to choose low-cost investment options.
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cryptocurrency
Cryptocurrency has been a controversial investment since its inception. While there are many highly publicized stories of crypto billionaires, there are just as many, if not more, investors who have lost large sums of money speculating in cryptocurrencies. As assets with no intrinsic value and an uncertain future, cryptocurrencies are by their nature volatile investments. It’s certainly possible that it could trade higher in the future, but there’s no real way to know, and many experts say it could easily lose all its value.
This makes cryptocurrencies a dramatically different asset class than stocks, which represent real-world companies with real products, revenues, and profits. Based on these trends, analysts and investors can assign fair values ​​and predict future growth. However, cryptocurrencies are only traded based on supply and demand. As investors flock to cryptocurrencies, prices can rise dramatically. But the opposite is also true, especially for smaller or lesser-known cryptocurrencies. For example, the Shiba Inu dog was invented as a joke, but its value increased by a staggering 45 million percent in 2021, according to a CNN report. But then it reversed dramatically, giving up almost all of those gains the following year. Retired investors need to avoid this type of volatility.
high beta stocks
High beta stocks are stocks that are more volatile than the overall market. For example, a stock with a beta of 1.2 moves, on average, 20% more than the general market. This means that if the market declines by 10%, stock prices tend to decline by 12%. This is good if the time horizon is long and the market is trending up, but if the time horizon is short and the market is falling it can be disastrous. For this reason, high beta stocks are generally not suitable for retirees as they may not have time to recover from significant losses in their stock accounts.
Low-yield traditional savings account
While traditional bank savings accounts may seem like a good, conservative option for retirees, they have some drawbacks that can be easily avoided. According to the Federal Deposit Insurance Corporation (FDIC), savings accounts have an average annual yield (APY) of just 0.46%. But with his FDIC-insured high-yield savings account, which is the same as a traditional bank, you can earn 10 times the yield.
There are several reasons why you might want to keep a traditional bank account, including the convenience of having your checking and savings accounts at the same institution. However, if you have a large amount of money stored in that account, such as an emergency fund, you could be missing out on hundreds or even thousands of dollars in interest each year if you don’t use a high-yield savings account.
speculative investment
Even during your working years, it’s best to keep speculative investments to a small portion of your overall portfolio, perhaps 5%. However, once you retire, most advisors will recommend avoiding speculative investing altogether.
Private equity, penny stocks, alternative investments, limited partnerships, etc. all have a high risk of loss and can be illiquid, making them unsuitable for the average retirement investor. At an age when you don’t have time to recover from large losses and need to raise money quickly, speculative investing is very likely to do more harm than good.
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This article originally appeared on GOBankingRates.com: 5 Investments to Avoid in Your Retirement Budget
