It’s a truism in retirement planning that the closer you are to retirement, the more you prioritize low-risk investments that can provide you with a steady income. At that point, the portion of your retirement portfolio in riskier assets like stocks and cryptocurrencies is smaller.
This is especially important when you are already a retiree. It’s about earning enough income from your nest egg to meet your monthly expenses （fully or partially, depending on what you are expecting from Social Security）。
However, it is interesting to note that even within the universe of low-risk investments, some provide higher returns than others. Thus, instead of purchasing just any low-risk investment, you can consider choosing the ones with higher risk-adjusted returns.
Here are seven high-return, low-risk investments that retirees can use to reduce their portfolio risk without leaving money on the table:
Dividend-paying stocks.
High-quality corporate bonds.
Treasury inflation-protected securities （TIPS）。
Municipal bonds.
Fixed indexed annuities.
Stable value funds.
High-yield savings accounts.
Dividend-Paying Stocks
Dividend stocks are company stocks that make regular payments to shareholders in the form of dividends. Since it takes a company that earns stable earnings to pay regular dividends, dividend stocks are considered more stable and low-risk. Many dividend stocks are also considered defensive stocks since the companies behind them typically operate in sectors （utilities, consumer staples and health care, among others） that generate steady cash flows irrespective of the economic cycle.
This makes it easy for them to remain steady even during market downturns. “Dividend stocks tend to be less volatile than non-dividend-paying stocks,” according to William Connor, a partner at Sax Wealth Advisors in New York.
Thus, retirees looking for low-risk investments can benefit from the stability of dividend stocks while earning consistent income. More importantly （for our purpose）， dividend stocks will usually provide higher returns than low-risk investments like bonds or savings accounts.
If you prioritize dividend-growth companies （those that consistently increase their dividend payout）， you will also get inflation protection because your dividend income will increase as inflation rises.
You can further minimize risk by purchasing a dividend stock exchange-traded fund, or a dividend-growth stock ETF.
High-Quality Corporate Bonds
Corporate bonds are less risky than stocks, which makes them appropriate for retirees. But they are riskier than Treasury bonds, which are backed by the financial power of the federal government.
Yet, investors who focus on only high-quality corporate bonds can earn higher returns without taking on too much risk. By “high-quality corporate bonds,” I mean investment-grade bonds from companies with good credit history and strong financials.
Many exchange-traded funds track such high-quality bonds, whether for the short, intermediate or long term.
Treasury Inflation-Protected Securities （TIPS）
TIPS are U.S. government bonds that are specifically designed to protect investors from inflation risk. They do this by allowing the principal value of the loan to adjust upward when the consumer price index, or CPI, rises. Since the coupon payments are calculated on the principal, you can receive a higher income whenever the CPI rises. Also, you receive the higher of the initial principal or the inflation-adjusted principal at maturity.
TIPS are low-risk because they are backed by the creditworthiness of the federal government. Yet, they can provide higher returns in the form of higher income during inflationary periods.
Municipal Bonds
Municipal bonds usually have similar yields and returns to Treasury bonds. And while the latter is risk-free, the former has some credit risk. Though defaults are rare, they happen.
Why include municipal bonds in this list, then? Because they are tax-free at the federal level and can be tax-free even at state and local levels. Thus, depending on your tax bracket, a municipal bond with a similar yield as a Treasury bond can be more valuable when you factor in taxes.
For example, if you are in the 32% tax bracket, a 3% muni bond will have a tax-equivalent yield of 4.4%. If a Treasury bond with the same maturity has a 4% yield, the municipal bond is more valuable even though it has a lower stated yield. So, if you are in a high tax bracket, municipal bonds can be a way to earn a higher yield in retirement.
Fixed Indexed Annuities
You have heard about fixed and variable annuities. The former pays a fixed amount while the latter’s payments vary based on the stock market’s performance. Fixed annuities are low-risk and thus appropriate for retirees, while variable annuities are high-risk and inappropriate.
However, in between these two are fixed indexed annuities. With these annuities, your returns are tied to a stock market index like the S&P 500 （like a variable annuity）。 However, if the stock market index declines, you won’t lose any money, as your principal will be protected irrespective of the size of the market decline.
What’s the catch （since there is no free lunch）？ The downside protection is at the cost of a limit on the returns you will enjoy when the market is on the upside. This can be in the form of a cap that sets a maximum return you can earn in a given period （say, 10% per year） and/or a participation rate, which is the percentage of the index gain you will receive （say, only 80% of the index’s returns will apply to your account）。
Fixed indexed annuities are low-risk investments since there is downside protection. Yet, they provide higher returns since your returns will track the index. Even with the cap and participation rate, you will earn more returns than with many other low-risk assets.
Stable Value Funds
These are low-risk investment options available in most employer-sponsored retirement plans, like the 401（k）。 They usually invest in high-quality fixed-income securities while guaranteeing the principal with insurance contracts. Stable value funds are low-risk because they offer principal protection. Yet, they provide returns higher than a typical savings account or even a money market fund.
“These don’t get nearly enough attention,” says Neal Gordon, founder and CEO at Gordon Wealth Planning in Rockaway, New Jersey.
“They can be a great fit for someone who’s looking for safety but wants better returns than your standard savings account,” Gordon adds. “They’re designed to protect principal and deliver steady returns, which can be really reassuring.”
High-Yield Savings Accounts
Some of the options we have considered may still seem too risky for you if you are ultra-conservative. In that case, you may be comfortable with only age-old savings accounts, with their FDIC insurance.
However, even with this option, you can earn higher returns. Many financial institutions （especially fintechs） offer high-yield savings accounts that still provide FDIC protection and do not require a lock-up period or minimum balance.
You can shop around for such high-yield options instead of locking your money in savings accounts that offer paltry interest rates. “High-yield savings accounts offer a safe place for cash while earning a higher interest rate than traditional savings accounts,” says Chad Gammon, a certified financial planner at Custom Fit Financial in Cedar Rapids, Iowa.
In the end, your financial advisor will be in the best position to offer a personalized recommendation of which high-return, low-risk investments to choose. So, take this list and have a discussion with them on the best way to proceed.