12 Investments No Retiree Should Make
In retirement, when it's wise to take fewer risks with your nest egg, some investments are just nuts.
Summary
Ron Tallou warns that just one or two bad years can set back a retirement plan, and walks through the investments retirees should avoid, from rental flips and alternative funds to the variable annuity he would tear up on the spot.
After a lifetime of hard work and saving, you're at the retirement finish line. Instead of a paycheck, you're relying on your nest egg and investment income to cover the bills. Picking the right investments is even more important, as you won't have much chance for a do-over.
"A stretch of just one or two bad years can really set back a retirement plan," says Ron Tallou, an adviser in Troy, Mich. On the other hand, since retirement can last decades, you need to invest for some growth and shouldn’t go all cash.
Know your needs
A successful retirement investment strategy should create steady, dependable income year after year, stay relatively liquid so you can pay for sudden major expenses, and minimize taxes and fees. High-dividend blue-chip stocks, diversified mutual funds and ETFs, investment-grade bonds, certificates of deposit and money market funds meet these criteria.
Avoid the shiny ball
Plenty of investment options offer the complete opposite: high fees, locked-up money, complexity and a high probability of losing money. "People get shiny ball syndrome and chase what’s in the headlines," says retirement planner John Gillet.
Income property
Buying an investment property means tying up a substantial amount of your savings in one illiquid asset. "Let’s say you’re trying to do a buy and flip. Are you going to be tearing up the floors yourself? Contractors often eat up all the profits," says Tallou. Instead, consider a real estate investment trust (REIT).
Alternative investments
Alternative funds such as hedge funds and private equity may promote higher historical returns, but fees can be very high and your money can be locked up. "You might be locked up for one to two years before you can cash anything out, and even then, they only give you the money back in installments," says Tallou.
A friend's new restaurant
Running any business takes considerable time. "You might think you’re buying something turnkey that runs itself, but if you’ve never worked in the industry before, you don’t know for sure," warns Tallou. "It can turn into a money pit."
The one investment Ron would tear up
Asked what investment he would worry about most if his 75-year-old mother brought it up, Tallou said: "Variable annuities. If someone presented a variable annuity to my mother, I’d tear the contract up on the spot. I’ve yet to meet someone who said they were happy they put money into this."