Many retirees receive distributions from retirement accounts, pensions, dividends or even part-time work. Should this income exceed immediate spending needs, retirees often look to put the excess back to work. Thoughtfully reinvesting surplus retirement income can help preserve wealth, protect against inflation and even grow your financial resources over time. However, the reinvestment options you choose should reflect your age, risk tolerance and financial goals.
A financial advisor can help you create a reinvestment strategy for your retirement needs.
6 Reinvestment Options for Retirement Income
Once you’ve determined how much of your retirement income is available for reinvestment, the next step is choosing the right vehicles to meet your needs. Most retirees prioritize safer, more stable assets. However, your specific situation — including your investment time horizon, income requirements and risk tolerance — should guide the strategy.
One thing that can help is segmenting your income into three categories:
- Funds needed for short-term expenses
- Money reserved for medium-term goals
- Assets earmarked for long-term growth or legacy planning
This can then help you decide how to invest that portion of your income. Balancing safety and return is essential, some retirees will want their reinvested income to outpace inflation or provide income. The following are some of the most common options:
1. High-Yield Savings Accounts
High-yield savings accounts offer retirees a secure and liquid option. Often offered by online banks and credit unions, these accounts earn a higher rate than traditional savings. Retirees usually appreciate the convenience and safety these FDIC-insured accounts provide, particularly when used as an emergency fund. That said, interest rates on high-yield savings accounts can fluctuate with the market. While these accounts offer stability, they may not provide returns that keep pace with inflation.
2. Certificates of Deposit (CDs)
Certificates of deposit, or CDs, allow retirees to lock in an interest rate for a few months to several years. For retirees seeking predictable income and a guaranteed return, CDs can provide peace of mind. The interest rate is fixed for the term of the CD and deposits are insured up to applicable limits.Â
Many retirees also use a strategy called “CD laddering,” where multiple CDs with staggered maturity dates are purchased. This approach balances higher yields on longer-term CDs with access to some of the funds as each CD matures. However, CDs come with certain trade-offs. Accessing the money before the CD matures often incurs early withdrawal penalties, reducing overall returns. Additionally, while CD rates provide stability, their yields can be lower during periods of rising interest rates or high inflation.
3. U.S. Treasury Securities
U.S. Treasury securities are government-backed investments that appeal to retirees seeking safety and predictability. Treasuries are available in a variety of terms, from a few days to as long as 30 years. This allows investors to choose options that match their income needs and time horizons.Â
Short- and medium-term Treasuries avoid the potential price volatility that can accompany longer maturities. Interest income from Treasury securities is exempt from state and local taxes, adding to their tax efficiency. Longer-term Treasuries can be sensitive to changes in interest rates, which may affect their market value if sold before maturity. Retirees relying solely on Treasuries may find that the returns fall short of keeping up with inflation over extended periods.
4. Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities, commonly known as TIPS, are a unique type of Treasury security. They’re designed to safeguard purchasing power against inflation. The principal value of TIPS increases with inflation, as measured by the Consumer Price Index (CPI), and interest payments are adjusted accordingly. For retirees concerned about rising living costs eroding their savings, TIPS can provide a reassuring layer of protection.
Despite their inflation-adjustment feature, TIPS often offer lower base interest rates compared to other bonds. If inflation remains low or stable, the total returns from TIPS may lag behind other income-generating investments. And increases in the principal value can lead to higher taxable income due to higher interest payments, even though they won’t receive the adjusted principal until the bond matures.
5. Dividend-Paying Stocks
Dividend-paying stocks exchange the potential of higher returns and growing income for exposure to market risk. Many retirees choose companies with consistent and increasing dividends, often found in sectors like utilities, consumer staples and healthcare. However, stock prices can fluctuate, sometimes dramatically, and dividends are not guaranteed. As with any stock investment, retirees need to balance the desire for income and growth with the potential for losses.
6. Fixed Annuities
Fixed annuities offer retirees guaranteed income payments for a predetermined period or for life. Retirees can purchase an annuity by making either a lump sum payment or a series of payments to an insurance company. In return, the insurer commits to delivering a steady income stream and a favorable interest rate. Fixed annuities also hedge against the risk of outliving retirement savings. Despite their appeal, fixed annuities are not without drawbacks. Many annuities come with fees, administrative costs, and surrender charges that can erode returns. They also often lack liquidity, meaning that accessing the principal once the contract is in place can be expensive or restricted.Â
Bottom Line
Choosing how to reinvest your retirement income requires balancing safety, income needs and growth potential. For most retirees, no single investment will be the perfect solution. Instead, a diversified strategy, combining several of the options discussed, can help provide financial security while preserving the flexibility to adapt as your needs change.
Retirement Planning Tips
- A financial advisor can help you create a strategy to grow and protect your nest egg. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Mandatory distributions from a tax-deferred retirement account can complicate your post-retirement tax planning. Use SmartAsset’s RMD calculator to see how much your required minimum distributions will be.
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