Common investing advice is to shift toward “safe” assets as retirement approaches. Bonds instead of stocks. More cash. Steady income over growth.
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But in retirement, the definition of safe can change. When your portfolio must generate income, hedge inflation and withstand market volatility, some traditionally conservative investments can introduce new risks. Financial advisors explain which formerly safe investments you may want to reconsider.
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Long-Term Bonds
Bonds are often grouped into one conservative bucket, but not all bonds behave the same, according to Erik Goodge, CFP, owner of uVest Advisory. “Long-term bonds have the added risk of being very sensitive to changes in interest rates along the yield curve. This is called duration risk.”
He explained that retirees who may need to tap their portfolio distributions sooner could be taking on unnecessary uncertainty through bonds. “If interest rates rise, long term bonds will fall in price much more than short-term bonds. The inverse is also true of course but it adds uncertainty to the portfolio,” he said.
Investors often misunderstand that bond values, even those of U.S. government bonds, can be volatile with market interest rates changes, according to Robert R. Johnson, Ph.D., a financial advisor and professor of finance at the Heider College of Business at Creighton University.
Bonds may reduce stock volatility, but they can magnify interest rate risk just when retirees need stability.
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Dividend Stocks (Sometimes)
Dividend-paying stocks are frequently marketed as a retirement income solution because they can be tax-efficient and historically reliable. However, Goodge cautioned that dividend payments are never guaranteed. “Companies retain the right to lower, pause or even stop dividend payments altogether and this has happened frequently in the past,” he said.
Johnson also warned against “chasing yield.” Some stocks with very large dividend yields are likely to have unsustainable dividend levels, he explained. He encouraged diversification.
Cash, CDs and Money Market Accounts
Cash-heavy portfolios feel safe because your money is liquid. But they come with other problems.
Goodge said concentrating heavily in certificates of deposit (CDs) or money market funds exposes retirees to “reinvestment risk,” meaning future yields may be lower.
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