If your retirement is three-four decades away, it is possible to overcome a significant loss on a high-risk investment. However, when you are almost on verge of retirement, the time gap between investment and requiring return gets reduced, which means it is increasingly impossible to recover a huge loss of capital investment.
When you are getting closer to your retirement, the first thing to consider is if your current investment portfolio is wisely strategized. If you have always been inclined to high-risk investment, it will be a sensible step to restructure your investment portfolio to make sure that you will be able to enjoy maximum return before retirement period kicks off.
The best portfolio for a person approaching retirement should feature minimum risk and optimum return. Here are two potential investment options for retirement planning in order to reduce risk of capital loss.
Bonds usually don’t involve any risk, providing securities on fixed proceeds. But on downside, it is subject to credit risk and interest rate. A bond refers to a loan from a corporation or government with an agreed payment of fixed amount of interest over a period of certain time until repayment of principal. The interest paid on the principal is linked with the credit risk willingly accepted by the borrower.
Bond ladders refer to a selection of bonds having different dates of maturity but similar credit ratings. For example, instead of buying a single bond worth $100,000 due in 10 years, I hold 10 bonds – each worth of $10,000 – of 10 positions, each maturing one year before the following position. I would get $10,000 as principal repayment through the next decade. With maturity of each position, I would be able to plow the proceeds into a new bond having 10-year maturity date.
Bond ladders protect the investors from soaring interest rate over upcoming decade. On flipside, there is a possibility of continued decrease in interest rate, causing a dip in bond value – which would almost force the investor to sell bonds instead of waiting for their maturity dates.
Annuities are bought from the insurance providers. Annuity investment may earn you a fixed rate for a particular time period or may be harvested in mutual funds or other market securities. The first type is called fixed annuity and the second one is known as variable annuity.
Variable type can experience a drop in value. However, there are several annuity products that guarantee or safeguard on the original investment, though often coming at additional expenses. Irrespective of annuity type, the investors can annuitize their policies, after the expiry of investment period, through which they can enjoy guaranteed payment over a particular length of time in lieu of the policy value. Investors also have an option to withdraw after investment or surrender period, keeping the contract value intact.