How to Invest Close to Retirement


One of the toughest tasks I can think of is learning how to invest later in life. In your 40s and 50s, which are your prime earning years, you’re putting your savings to work in stocks, ETFs and mutual funds. It’s pretty straightforward with the end result being (hopefully) a retirement filled with enough money to maintain the same standard of living you had while working.

how to invest, retirement

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That’s not an easy task given the difficulty most Americans have saving money, combined with the fact people are generally living longer. Your money has to go farther, which makes learning how to invest later in life a very important task. No longer can you invest in treasury bills and hope to keep up with inflation.

A friend of mine who’s 80 but young at heart recently came into $100,000 from a business deal he exited. He’s asked me for some suggestions where to put some money. His priorities are preservation of capital, income and growth — in that order.

For the purposes of this article I’m going to assume that the $100,000 my friend would like to invest is about one-fifth his savings — not including his home, which is mortgage-free and likely worth more than $1 million. Yes, he’s comfortable compared to most especially given his age. That said, he’s conservative by nature and doesn’t know a lot about how to invest in the markets, so I’ll need to keep things simple.

Here are three ideas about how to invest later in life without risking your retirement.

How to Invest — Solution # 1

how to invest, retirementCall me crazy, but my first recommendation is a bond ETF, specifically the PowerShares Build America Bond ETF (BAB), which invests in bonds issued by U.S. states, municipalities and related government agencies.

BAB got its start in November 2009, and it tracks the  Bank of America (BAC) Merrill Lynch Build America Bond Index. The average number of years to maturity of the 256 bonds held by BAB is just under 20 years, with 87% rated “A” or higher. Included in the top 10 holdings are the State of Illinois and California with no bond paying less than a 4.6% coupon.

So why would I recommend putting someone 80 years of age in such an investment?

While I believe my friend has every intention of sticking around another 20 years, it does potentially open him up to interest rate risk once rates start moving higher. Furthermore, he doesn’t escape that risk just by making it to 100, because new bonds will have been bought with equally long maturity dates. However, I’m willing to take that because the SEC 30-day yield of 3.96% is about as good as you’re going to get without jumping into preferred and high-yield ETFs, which possess their own set of risks.

Morningstar gives BAB a five-star rating over the latest three-year period ended August 31. Although Morningstar’s ranking system is historical in nature and not any sort of current rating, I do believe it reflects positively on this particular ETF. Morningstar associates BAB with above-average risk, but if you’re wondering how to invest a fairly significant financial backstop in a risk-averse way, it’s tough to do better than BAB.

How to Invest — Solution # 2

how to invest, retirementThe Vanguard Managed Payout Fund (VPGDX) is the sole survivor of a trio of funds who’ve since merged into this particular mutual fund. The VPGDX is meant to supplement an investor’s retirement income by paying out a monthly distribution equal to 4% on an annual basis.

But two things have plagued the 3-fund setup. First, the trio got their starts at the height of the equity correction in 2008. Secondly, with three different payout targets (3%, 5% and 7%), it wasn’t easy keeping up with inflation. By merging into one fund with a singular focus, the VPGDX has gotten a lot better at doing what it was intended to do. That’s because 4% is routinely touted by financial professionals as the recommended rate of spending in retirement.

Interestingly, Morningstar gives VPGDX a five-star rating and more importantly, a bronze analyst rating which means they also expect it to do well in the future. Currently, 73% of the fund is indirectly invested in equities through five different Vanguard Funds including the Vanguard Total Stock Market Index Fund (VTSMX), which covers the widest swath of U.S. stocks possible, and only charges 0.17%. The VPGDX is also charging a mere 0.34% per year. You can’t go wrong on fees when it comes to Vanguard offerings. I know my friend will like the cheap approach.

How to Invest — Solution # 3

how to invest, retirementRemember in the beginning I said that I’d have to keep things simple? Well, you can’t get any simpler than the Voya Corporate Leaders Trust Fund Class B (LEXCX). This particular fund invests in some of the largest and historically most stable blue-chip companies in America. Created in 1935 with 30 of the best companies of the day, it survives today with just 21 companies in its list of holdings. However, with names like Berkshire Hathaway (BRK.B), it’s a thing of beauty.

In recent years, the fund has had a tough time beating the S&P 500, trailing the index year-to-date and in 2012 and 2013. The long term, however, is a completely different story. LEXCX is outdistancing the index on an annual basis by 323 basis points over the past 15 years. There’s no buying or selling that goes on with LEXCX. It’s entirely passive, buying at least 100 shares in each of the companies as more money flows into the fund. It’s genius.

Some might balk at the annual expense ratio of 0.52%, but if preservation of capital is important to you, it’s tough to beat this fund. LEXCX saw its total return decline by 29.3% in 2008 — almost eight percentage points lower than the S&P 500’s decline. Yet its SEC 30-day yield of 1.6% is only slightly lower than the SPDR S&P 500 ETF (SPY) at 1.8%. If you’re wondering how to invest in equities later in life, LEXCX is the way to go.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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