Retirement may be a new chapter in life, but it can also be nerve-wracking for retirees as they transition from a steady paycheck to savings. To ease the financial burden, many are selling less attractive investments and converting their portfolios into cash or other forms of equity.
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To strategize the smartest way to liquidate investment options and supplement your income, GOBankingRates spoke with experienced financial advisors, who shared their valuable insights on which investments to sell during retirement and the rationale behind their recommendations.
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Municipal Bonds
“Municipal bonds are debt instruments issued by state or local governments as a commitment to fund construction projects within a community,” said Michael Nover, financial portfolio adviser at Snyder Balducci Group.
“Instead, the investor receives interest payments once or twice a year until the principal is repaid. The key thing about municipal bonds is that the interest received is exempt from federal income tax and, if the bond is located in the investor’s state, also exempt from state tax.”
He adds, “In retirement accounts, money grows tax-free, so the benefit of tax-free income is unnecessary. And because of this exemption, long-term returns on municipal bonds have traditionally been lower than taxable bonds, so they don’t generate enough returns to justify a place in a retirement portfolio.”
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real estate
Real estate is another investment that Nober recommends selling after retirement.
“Real estate typically requires significant maintenance costs and a large lump sum payment, which creates a barrier to entry and doesn’t fit into retirement plans,” Nober said.
“Additionally, there is an inherent risk that real estate values ​​may decline over time and that even a conservative investment portfolio that is expected to grow 4-6% annually will underperform expectations,” he said.
“Finally, it is definitely not advisable to take out a mortgage or loan to invest your retirement savings in property. Interest rates are currently at historically high levels and retirees living on a fixed budget may end up paying more than their means to finance the deal,” he concluded.
High risk or volatile stocks
David Reyes, founder and chief investment officer at Reyes Financial Architecture, suggests getting rid of risky stocks during retirement because “they’re just too nerve-wracking. You know those stocks that go up like a rocket one day and crash the next? Sell those stocks to protect your savings from a rollercoaster ride you don’t need.”
Speculative ventures
Another investment Reyes recommended selling when he retired was a speculative business.
“It’s tempting to chase the next big thing, but remember that stability is key in retirement,” he said. “Selling speculative investments means you’re not gambling on your future.”
Unlisted stocks
Retirees should consider selling into private equity, said Sam Ellis, a wealth management adviser at Greenleaf Trust.
“Certain investments, such as private equity holdings, may offer attractive returns but lack the necessary liquidity. After retirement, it is essential to have easy access to funds to cover living expenses and unexpected costs,” he suggested.
He added: “Time horizon is a big consideration when considering private equity investments. Due to lack of liquidity and increased risk profile, limiting your exposure to private equity investments in retirement can help provide greater flexibility and liquidity in your retirement portfolio.”
Life insurance
Ellis also suggested that retirees should review their life insurance policies to see if it makes sense to continue holding onto them.
“While life insurance is not technically an investment, it is worth reconsidering when assessing your retirement assets,” he said.
“Individuals take out life insurance throughout their working lives to provide income security for their families in the unfortunate event of their premature death. In some cases, it may make sense to continue to have life insurance after retirement. However, you should evaluate the ultimate purpose of the life insurance to determine if it still makes sense to hold it,” Ellis added.
Nober also shared his own views on the matter: “The most important advantage of a traditional Individual Retirement Account (IRA) is the tax-deferred growth of assets. Simply put, funds in a retirement account grow tax-free over time unless they are withdrawn before age 59 1/2. However, if the funds are transferred to a life insurance policy, individuals are subject to a 10% penalty and taxed at ordinary income levels.”
Highly Leveraged Investments
Finally, Reyes said retirees should consider selling highly leveraged investments.
“These are like playing with fire, and while you may get hit with a severe heat wave, you may also get burned. Selling highly leveraged investments can protect you from getting burned and provide a more stable source of income in retirement,” he said.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: Here are 7 Investments to Sell Before Retirement
