What Is The Safest Retirement Plan?
February 23, 2021Retirement Wealth
Safe investing is not as exciting as riskier options, but it gives you a better chance of having a guaranteed nest egg. But what is the safest way to invest?
Investing for retirement can be daunting. Some investments have historically outperformed others, some offer guaranteed income, and other options are sometimes no better than gambling. If you know that you don’t have much of an appetite for risk and want to play it safe, don’t worry. There are plenty of safe investment options for retirement that will still afford you the lifestyle you want.
The safest investments for retirement are ones that either pay you a steady, guaranteed income after you quit working or ones that have very little risk involved. The best options for safe investing include earning a pension, buying an annuity, or investing in bonds instead of stocks.
Saving for retirement has been an important topic of discussion for many years. It’s something that countless studies have been done on and a topic that we’ve spent many years studying and practicing. All the information you get from this article comes straight from some of the most reliable financial studies ever and years of hands-on experience.
Table of contents
What are the Safest Investments for Retirement?
When it comes to saving for retirement, there’s a lot of information that goes into deciding what the best options are for you. These include things like what your retirement goals are, how much time you have until you want to retire, and what your appetite for risk is. Depending on your answers to all of these questions, you will likely choose to save for retirement differently than others. It’s specific to everyone’s own situation.
Younger people typically invest more aggressively with riskier options since the time horizon is so long, while people getting closer to retirement want to be more conservative with their nest egg. But those options are not for everyone, and many people choose to play it safe all along to ensure a comfortable retirement.
So what is the safest retirement plan? Let’s take a look at some of the safest investment avenues available for retirement:
Should I Work Towards Earning a Pension?
Pensions are retirement plans that employers offer to their employees for their years of hard work and contributions to the pension fund. Similar to an annuity — more on those shortly — a pension pays out steady monthly income during your retirement years. For this reason, many people aim to work a career that offers a pension even though employer-sponsored 401(k) plans have replaced this option in many careers.
Pensions can vary widely and have a vast range of options. Some pensions will pay you a steady income for the rest of your life after you retire. Other options are designed to pay for a certain number of years. And some pensions will continue to pay the agreed-upon payments to your spouse if anything were to ever happen to you. For the security that guaranteed monthly income offers you, pensions are one of the safest forms of retirement out there.
Keep in mind, though, that pensions are not easy to earn and they’re not usually fully guaranteed. You will typically have to work many years with the same company or agency to earn a pension that will pay a substantial amount in retirement. And if the pension fund ever somehow runs out of money, there is little hope of getting any more payments from that employer.
For a quick example of earning a pension, let’s look at a government employee since the pension plan offered by the federal government is the single largest pension in the country. A government employee that spends 30 years working for the government and whose three highest-earning years average out to $100,000 per year will earn a pension of $30,000 per year during retirement, plus annual increases for inflation.
That may not seem like a lot to live on when their salary was much higher, but it’s steady and guaranteed income. And it’s just one part of their retirement plan.
Are Annuities a Safe Retirement Plan?
The short answer to the question is yes, annuities are one of the safest retirement plans out there. As alluded to above, a pension is more or less a type of annuity. Taking that a layer further, annuities can more or less be thought of as insurance for retirement. You pay into the annuity fund and then during your retirement years, the firm that holds the annuity will then pay you guaranteed steady monthly payments.
Annuities, like the pensions above, can come in all different shapes and sizes. The two most important aspects of annuities to keep in mind for a safe retirement plan are when you want the payments to start and how you want the payments to be structured. You can have annuities that payout until death or payout for a certain number of years, for example.
Then you also have the decision on purchasing an immediate annuity (starts paying you right away) or a deferred annuity (starts payments at a later date, i.e. 10 years down the road). Lastly, you can choose between fixed payments or variable payments. With a fixed annuity, the payments are equal throughout the life of the plan. With variable payments, the amount changes depending on how the annuity fund is performing in the market. Some payments will be more, some will be less.
No matter which type of annuity you choose and how you decide to structure it, they are one of the safest retirement plans out there. The steady income and guaranteed payments ensure that you won’t be left high and dry during your golden years.
Should I Invest in Bonds or Stocks for Retirement?
When it comes to retirement savings, the vast majority of those who invest for the future do so in the stock market or bond market. While there are riskier and safer options within both camps, it is widely accepted that bonds are a much safer option for conservative investors. So if your main concern for investing is having a safe retirement plan, then bonds are the better of the two options for you.
Let’s take a quick look at what bonds are and why they’re such a safe option for retirement investing. When you buy a bond from a corporation or, more commonly, the government, they are effectively in debt to you. And they’ll pay interest to you while the bond matures to its full value.
This is why US Treasury bonds are such a popular choice for safe investors. There is almost no chance of the Treasury being unable to pay you back (like there could be with company-issued bonds) and you can lock in a fixed interest rate.
What about stocks? Even though stocks have historically outperformed bonds overall, they are far riskier and fluctuate a lot more. So when it comes to a much safer retirement plan, you will want to focus on investing in bonds instead.
What is a Safe Withdrawal Rate in Retirement?
Regardless of how safe your retirement plan is, it can all be for naught if you consistently withdraw too much from your nest egg during retirement. Compounding interest — even if you’re just invested in bonds — is the only way for your nest egg to grow once you quit working and stop contributing to it. Withdrawing money too fast greatly hinders the ability of your nest egg to grow.
So it’s vital that you have a safe withdrawal rate to give yourself the best chance of never running out of money. Based on the famous financial study known as the Trinity Study, it’s long been accepted that an annual withdrawal of about 4% is the upper bound of a safe withdrawal rate (the 4% rule). This gives your nest egg over a 95% success rate of lasting at least 30 years based on historical market returns.
But it always could run out of money. And that’s why the key to a safe retirement is a combination of any of the three listed above. If you have a pension or an annuity and your retirement account runs out of money, you’ll still have the steady income coming in. Or if the pension or annuity fund runs out of money and leaves you high and dry, you’ll have your other investments to fund your retirement.
Diversity is the key to a financially-safe retirement — both in the investments you make within your portfolio and also in the types of retirement plans you opt to invest in.
About THE AUTHOR
With multiple family members currently in senior living facilities, David is in the trenches every week, learning the ins and outs of nursing homes, assisted living, memory care, and general senior living.Read more about David Bolton
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We love planning for retirement. It's somewhat of a hobby, and we want to share what we've learned with you. Over the years we've found the best ways to live, how to travel, take on new hobbies and give back. Happiness in retirement is the main goal, and having the right information allows us (and you) to achieve that.
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