Retirees tend to be conservative investors, but even the safest products can pose significant investment risk.
The vast majority of retirees say they are moderate or conservative investors, but not all seniors may realize that traditionally safe financial products such as bank CDs and Treasuries pose significant investment risk in the current economic environment.
Nearly 23 percent of retirees say they are unwilling to place any of their investments at risk, and more than 60 percent say they are willing to subject only a limited portion of their assets to investment risk, according to a survey of 1,150 investors conducted by Millionaire Corner in February. In contrast, about 16 percent of working Americans report being conservative and 55 percent say they are moderate investors.
At the other end of the investment risk scale, less than 1 percent of retirees describes themselves as “most aggressive” investors, willing to place all of their investments at risk in the quest for the highest returns. (Working Americans are more than four times as likely to say they have the highest tolerance for investment risk.) Another 14 percent of retirees describe themselves as aggressive, willing to place a significant portion of investments at risk, compared to 24 percent of working Americans.
What these risk-adverse retirees may not fully realize is that prevailing low interest rates raise the level of investment risk posed by traditionally safe retirement products, such as certificates of deposits and Treasuries. The appeal of CDs and federal bonds is two-fold. They guarantee principal and provide a fixed income. The yields can be meager, though, under prevailing low interest rates, the result of federal money policy likely to continue through 2012. Current yields on a five-year CD remain below 2 percent, according to Bankrate.com, while this weeks yield on a 10-year Treasury averages to 2 percent, according to government data.
At these low rates fixed-income products are subject to a type of risk known as inflation risk, because the investments fail to keep pace with inflation, increasing at an annual rate of 2.9 percent, according to Commerce Department data released today. According to the Financial Industry Regulatory Authority, inflation risk describes a decline in the value of money and a reduction in purchasing power.
Many fixed-income products are also prone to liquidity risk because investments are locked in for periods typically ranging from six-months to 10 years. Penalties apply to investors who wish to move their money to a better investment, such as a CD at a higher interest rate. Rising interest rates pose another type of investment risk for fixed-income products, said FINRA, which explains that an existing bond can lose face value because newly issued bonds at higher interest rates will be more attractive to investors.
Retirees are faced with difficult choices in the current low-interest rate environment, but it doesn’t appear many are willing to accept more investment risk to improve yields. Only 6 percent of those surveyed by Millionaire Corner in February say they are likely to become more aggressive in the current economic environment, but an even larger share, 32 percent, said they will become more conservative, further reducing the investment risk in their portfolios.