As investors grow older, they become more sensitive to risk. This is because they generally have smaller incomes and less time to recover from financial setbacks than when they were younger. However, if elderly investors choose to completely shield their nest egg from risk, they face the possibility of running out of money later on in life. Elderly investors must choose an investment portfolio that matches their risk tolerance and provides sufficient potential for growth
Certificates of Deposit
When you buy a CD, you promise to invest a fixed amount of money with a bank for a set amount of time, such as a year, five years or even more. In exchange for your cash, the bank promises to return your money with interest. CDs are attractive to conservative investors, because they are covered by federal deposit insurance up to $250,000 per signature on the account. An added benefit is that you can withdraw from your investment on short notice, although you may have to pay an early withdrawal fee or lose some of the interest you made on your investment.
Equity-linked CDs combine the terms of a certificate of deposit with those of a index-linked mutual fund. As with CDs, you promise to give over your money for a set period of time, usually five years, and your money is insured by the FDIC. However, instead of receiving a fixed interest, the return on your investment is determined by how well a particular stock market index, such as the Dow Jones or NASDAQ, performs. This type of CD provides higher potential for profit than regular CDs, but there is no guarantee your investment will earn anything. If the stock index your CD is linked to does not perform well, you could end up with nothing but your initial investment.
Money Market Funds
Money market funds pool the savings of many people and invest them in a wide array of conservative securities, such as commercial paper of companies, CDs and Treasury bonds. Money market funds are not insured by the FDIC, so investors do risk suffering losses if investments perform badly. However, this is rare, because money market funds are required by law to invest in low-risk securities and strive to keep their net asset value at a constant $1 a share.
When you purchase a fixed annuity from an insurance company, the insurer promises in exchange to make regular payments until you die. This is attractive to investors who don't want to deal with the uncertainty of the stock market and want to avoid the risk of running out savings during retirement. A fixed annuity has the added advantage, as with 401(k)s and Roth IRAs, of being a tax-deferred investment, which means you don't have to pay taxes on the interest you earn until you withdrawal the amount you invested. On the other hand, fixed annuities are not insured by the FDIC and, due to inflation, the purchasing power of the fixed payments could decline with time.
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