Things change as we grow older. When it comes to investments, most everyone becomes more risk-averse and security seeking. However, at the same time, a secure income from passive investments is often a must. While this may seem like a conundrum, there are a few investments that offer relative security and income.
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Of course, there are always tradeoffs between risk and reward when investing. It is up to each individual, regardless of age, to decide what investments make sense.
This article identifies the three best ways to invest for those over 60. Remember that not every investment is a good fit for everyone. In other words, there is no one-size-fits-all when it comes to investing. Here are my three favorite ways for seniors to invest:
1. Peer-to-Peer Lending
Great financial change has taken place over the last dozen years. Like most radical change, it happens without most investors even realizing it has taken place.
One relatively new investment arising from this shift away from banks is peer-to-peer lending. Individuals can utilize this new financial tool as both the borrower and the lender.
Investopedia defines peer-to-peer lending as a method of debt financing that enables people to borrow and lend money -- without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman, such as banks, from the process, but it also involves more time, effort, and risk than the general brick-and-mortar lending scenarios.
Both the borrower and the lender benefit from peer-to-peer loans. The edge to the people making the loan is that they create steady income via interest payments -- the interest that can be earned via traditional tools like CDs, saving accounts, and money market funds.
At the same time, borrowers gain from being able to qualify for loans that they may be turned down for from traditional sources.
Loans are scored with borrowers with worse credit paying higher interest rates than those with good credit. Investors can choose what grade loans to invest in depending on how much risk they are willing to take. Remember, you are investing in a portfolio of loans rather than a single loan which dramatically mitigates the overall risk factors. You can also invest across credit grades spreading your risk and security via certain portfolios.
Prosper.com and LendingClub.com are the leading peer-to-peer platforms. Prosper and LendingClub have historically averaged around 5.5% returns for investors. Remember, both platforms have fees and costs applied to your investment, which lowers your return. Compare and contrast the two platforms to choose what one makes the most sense to you.
I strongly think that investing in peer-to-peer lending makes perfect sense for now and the future.
2. Indexed Annuities
Famous success coach Tony Robbins lays out the case for indexed annuities in his excellent book "Money: Master The Game."
While there are inherent issues with indexed annuities, they make sense for some investors.
An indexed annuity attempts to provide the impossible of upside gains without the risk of loss. However, this comes with a cost.
How it works is an insurance company invests in bonds that will pay out a certain amount at the annuity's maturity. With the rest, the insurer can buy stock options to participate in a portion of a stock market index's upside.
The problem is high surrender charges, expenses, and even caps on the gains can lower potential returns dramatically. Also, expect low returns of 2-4% in most cases.
While it is possible to lose money with indexed annuities, they offer security not available with most other investments.
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3. Municipal Bonds
Municipal bonds are debt securities issued by the state, county, and municipal governments.
Municipal bonds are a fantastic investment tool for those over 60 since they provide a method to ensure long-term, relatively safe income for life. While municipal bond yields are lacking compared to other investments, the security for elderly investors is a huge positive. Plus, certain tax advantages may create an ideal investment for some.
The default rate is incredibly low in muni bonds at 0.089% for all-rated municipal bonds over the last 46 years.
The above three investments are listed in order from my most favorite to least favorite. However, as stated above, everyone's situation is different, requiring different investment tools.
Risks To Consider: Despite being considered relatively safe by most, risks exist in every investment. Always diversify and never put all your eggs in one investment basket!
Action To Take: Consider one or more of the above investments for your portfolio.