Safest Investments for a Boomer’s Portfolio

Reviewed by Somer AndersonFact checked by Yarilet PerezReviewed by Somer AndersonFact checked by Yarilet Perez

Baby Boomers, born between 1946 and 1964, have driven significant societal change throughout their lives. Their births helped fuel suburbanization in the 1950s, and their college years fueled the countercultural movements of the 60s and 70s. In middle age, their sheer numbers transformed industries like housing and healthcare, while their consumer power shaped marketing trends.

As Baby Boomers enter their retirement years, they’re not slowing down. They’re redefining what it means to be retired, seeking active lifestyles, pursuing new passions, and even starting second careers. However, they need investment strategies to support retirements that prioritize safety and stability while generating income.

“The Baby Boomer generation has a lot to juggle as they transition into retirement. They not only have to find new ways to occupy themselves both physically and intellectually but also ensure they can sustain themselves financially—and that’s not without headwinds,” said Michael Carbone, a certified financial advisor with Eppolito Financial Strategies in Westford, Massachusetts. “I think it’s more important than ever for retirees to manage their investments wisely, to ensure they’re successful throughout their later years.”

Key Takeaways

• As you approach retirement, it is important to find safer investments to protect the value of your nest egg.
• Inflation is an important consideration since it can eat away at the value of your savings.
• Certificates of deposit (CDs) are considered very safe investments, but they may not keep up with inflation.
• U.S. Treasurys are also considered reliable and are often used to store value during a downturn.
• Municipal bonds, corporate bonds, and bond funds have specific advantages—relative safety and sometimes tax advantages—that need to be compared in terms of your risk tolerance and investment needs.

With the average 65-year-old living almost two more decades, ensuring your portfolio lasts is crucial. According to Social Security data, a 65-year-old man can expect to live until 84, while women can anticipate reaching 87, and a third of them live to 90 while one in seven are expected to live to 95.

Carbone suggests keeping your investments conservative. “If a baby boomer is spending a high percentage of their financial assets each year—more than 3% of the total—and is concerned about the state of things, they ought to consider erring to the more conservative side of the portfolio risk spectrum.”

This guide is tailored to the needs of Baby Boomer investors. We’ll explore the safest investment options that mitigate risk and protect your nest egg from inflation.

Bank savings accounts are suitable for short-term cash needs in the next year or two, but you should look to other relatively safe options for the rest of your portfolio.

Inflation Risk

When considering safer assets for your retirement portfolio, it’s crucial to factor in the impact of inflation. This occurs when the prices of goods and services go up—or the value of the dollar and what it can purchase falls. Even a modest inflation rate can significantly erode the value of your savings.

To maintain your desired lifestyle in retirement, your portfolio must grow at a rate that outpaces inflation. This is where the problem with traditional “safe” options, such as bank savings accounts, becomes apparent. As of May 2024, the national average savings account annual interest rate was 0.46%. While these accounts may preserve your capital, they fail to provide the growth necessary to combat the effects of inflation, leaving you vulnerable to a loss of purchasing power over the long term.

To mitigate the risk of inflation, it’s essential to allocate a portion of your retirement portfolio to investments that have the potential to outpace inflation. By diversifying your portfolio with a mix of safe and growth-oriented assets, you can work toward preserving your wealth and maintaining your purchasing power throughout your retirement years. Below is the annual rate of inflation from 2000 to 2024.

Certificates of Deposit (CDs) 

Banks offer CDs and are insured by the Federal Deposit Insurance Corp. (FDIC), making them as safe as your savings account. However, you must leave your funds in the account anywhere from three to 60 months; withdrawing them before that will come with a penalty.

Some CDs are offered through brokerage companies, but the FDIC likely does not insure those. Interest rates vary based on the time you must leave the money in the account and the dollar amount you have on deposit. While these investments are insured, even investing in the best CD rates may not earn enough interest to serve as a hedge against inflation. As of May 2024, 12-month CDs had an annual interest rate of 1.80%, and 36-month CDs were 1.42%.

Important

Bank accounts and CDs are safe ways to store cash, but they will often lose value because of inflation. Bonds, stocks, and mutual funds are much more likely to beat inflation over the long run.

U.S. Government Bills, Notes, or Bonds 

U.S. government bills, notes, and bonds, also known as Treasurys, are considered the safest investments in the world and are backed by the government. These investments are sold in $100 increments, and you can buy them yourself at TreasuryDirect. 

Carbone said he thinks Treasurys should be among your options given the economic climate in which Boomers are retiring. “I think we’re objectively at a point of elevated uncertainty, where expected future stock returns are below average and the odds of experiencing volatility is relatively high,” Carbone said. “The current climate may support an argument for dialing back exposure to riskier assets for bonds,” which would make bond mutual funds attractive. However, there’s a personal choice here, given one’s situation. “Most American retirees need equity-like long-term growth potential to offset their increasing spending needs. I do, however, feel strongly that investors should be prioritizing their liquidity needs and personal risk tolerance.”

Treasury Bills

These mature in four weeks to one year. They are sold at a discount to their face value, and then you are paid face value at full maturity. Treasury bills pay higher interest rates for longer maturity dates, so it’s worth getting 52-week bills if you plan on holding them for some time. Interest on Treasury bills is exempt from state and local taxes, but you still have to pay federal income tax.

Treasury Notes

These range from two to 10 years in length. They pay interest every six months that you hold them. They can be sold at a price equal to, less than, or greater than their face value, depending on demand. Notes with a higher interest rate will likely have more demand, so their price will probably be greater than their face value.

Treasury Bonds

These mature in 20 or 30 years and pay interest every six months that you hold them. While the interest rate is guaranteed, the purchase price goes up and down, and you can take a significant loss if you need to sell them before maturity.

Municipal Bonds 

Municipal bonds are tax-free, making them a great option if you’re investing outside a tax-advantaged retirement plan. State and local governments sell municipal bonds to build local infrastructure and other projects for the public good. Their safety and tax-free status can be a great bonus for any savings that you have outside an individual retirement account (IRA), 401(k), or similar retirement investment.

U.S. Treasury Inflation-Protected Securities (TIPS) are a great way to have the safety of a government bond while protecting against the risk of inflation.

They are not a good option for tax-deferred retirement accounts because they earn lower interest rates than other types of bonds, and you don’t need a tax-free investment for qualified retirement accounts. Always check the ratings before buying municipal bonds, as some are safer than others.

Bond Mutual Funds 

Bond mutual funds can be an excellent alternative to buying bonds directly. Relatively speaking, bond mutual funds have among the lowest risk among mutual funds.

Carbone warned investors not to “view them as investments that don’t go down in value.” He suggested Boomers use bond ladders, which involve buying a series of bonds with different maturity dates. This approach spreads out the maturity dates over a period of time, providing regular income and reducing interest rate risk. As each bond matures, the principal can be reinvested into a new bond at the end of the ladder, “meeting their next few years of spending needs on a rolling basis, Carbone said. He also noted that his strategy helps investors manage interest rate fluctuations and provides a steady stream of income. “This may offer investors more flexibility and peace of mind as they regularly have liquidity,” he said.

As with any mutual fund, you purchase the number of shares you want, and a professional money manager researches the best bonds from those included in the fund’s portfolio. The three types of bond funds considered safest are government, municipal, and short-term corporate bond funds.

What Are the Safest Investments With the Greatest Return?

Typically, the highest returns are also associated with the riskiest investments. AAA-rated bonds are considered among the safest investments but have the lowest yields. On the opposite end, stocks have higher risks and higher returns.

What Are the Safest Stocks?

The least risky stocks tend to be those of large, mature companies with stable growth and profitability. Called blue chips, these stocks also often pay dividends for those seeking to generate income from their portfolios.

What Is the Safest Investment During a Recession?

Short-term U.S. Treasurys are considered among the safest investments during a recession. Since the probability of a default is almost inconceivable to most investors, Treasury bonds are reliable for storing value even in times of great uncertainty.

What Is the Safest Investment for Short-Term Investing?

Short-maturity bonds, money market funds, and certificates of deposit (CDs) with short maturities are good options for short-term investing, as they can mature in several months rather than years. However, they may not hold value against inflation, so it would be wise to look for more permanent investments if you are investing for longer periods of time.

What Are the Safest Investments for a 401(k)?

The typical advice is to invest aggressively when starting out and move to less risky assets as one approaches retirement. The most aggressive assets are stocks, while the safest ones are bonds. One strategy for a retirement account is to use a target-date fund that grows more conservative as your retirement date approaches.

The Bottom Line

Once you get to retirement age, preserving your portfolio becomes a critical issue—but you can overdo it. Putting all your funds in an FDIC-insured bank savings account will not earn you enough money to keep up with inflation. Other slightly riskier investments can minimize the loss of your portfolio to inflation but still offer little chance for growth for Boomers nearing retirement.

Read the original article on Investopedia.