Financial Advisors Say These 8 'Safe' Investments Might Not Actually Be Safe for Retirees

When building a nest egg, many retirees opt to include "safe" investments. After all, it's natural for your risk tolerance to decline as you age. But, unfortunately, many so-called "safe" investments may not actually be safe for retirees, according to these financial advisors.

If you want to see where you stand financially, it's helpful to make sure you're comfortable with the level of risk in your investment portfolio.

Too much cash in the bank

"A lot of retirees, including my clients, sleep better knowing they have a substantial amount sitting in a savings account or money market fund," says Steve Sexton, CEO of Sexton Advisory Group.

Of course, Sexton acknowledges that there's nothing wrong with having some cash reserves. But if you're keeping too much of your assets in cash, it could be a bad idea.

"I've met retirees with hundreds of thousands of dollars parked in cash because they're afraid of the market," says Sexton, "A decade later, the account balance looks about the same, but everything around them costs significantly more."

Since inflation can erode your purchasing power over time, keeping too much cash on hand can end up hurting your finances over the long term.

Long-term CDs

Certificates of deposit (CDs) pay interest in exchange for locking up your funds for a set period. While these can be useful at some level, it's generally not a great idea to have too much of your funds locked in a long-term CD, according to Sexton.

"If rates rise, inflation spikes, or your circumstances change, you may find yourself stuck earning yesterday's rate," says Sexton, "For some retirees, that's a reasonable compromise. For others, it can become a frustrating limitation."

Annuities

Many retirees choose to purchase annuities in order to unlock a steady income stream. But these popular investment products aren't always the best choice.

"They promise stability, but often come with high fees, limited liquidity, and complicated structures that are difficult to unwind," says Nadeem Kassam, chief investment strategist at Marnoa Private Wealth Counsel.

If you're hoping to stretch out your retirement nest egg, the fees attached to many annuities might eat away at your savings.

Long-term bonds

"Many retirees view bonds as inherently safe, but long-duration bonds can experience significant losses when interest rates rise," says Scott Schuebel, CFS, AIF, and CEO at Statera Advisors.

You still might choose to include long-term bonds in your portfolio. But it's important to consider the real risks.

Paying down low-interest debt

Some retirees choose to pay down low-interest debt aggressively. For many, the idea is to cut their expenses in a big way. For example, paying off a mortgage at a low interest rate might help a retiree significantly lower their expenses.

But aggressively paying off low-interest debt isn't always the right financial decision.

"Retirees should evaluate these decisions through the lens of their overall financial strategy rather than focusing on a single goal, such as eliminating debt or avoiding market volatility," says Stewart Willis, president at Asset Preservation Wealth & Tax.

Willis continues, "The objective isn't simply to preserve assets, it's to create sustainable income, maintain flexibility, and protect purchasing power throughout what could be a 20- to 30-year retirement."

Bond ETFs

In place of individual bonds, some retirees choose to purchase investment-grade bond ETFs. Importantly, these don't carry the same risks as an individual bond.

"When an investor owns an individual bond and holds it until maturity, temporary price declines generally matter less because the investor continues receiving coupon payments and, assuming no default, receives principal back at maturity," says Sanjeev Pati, CFA and founder of Scatterplot Analytics.

In contrast, bond ETFs don't mature. "While they may offer attractive yields, they do not provide the same certainty of principal recovery tied to a maturity date," says Pati.

Private equity

"Those saving for retirement may soon have access to private equity through their 401k investments," says Daniel Strachman, managing partner of A&C Advisors LLC.

According to Strachman, this move is more likely to benefit private equity groups than retirees seeking reliable returns on their investments. If offered an opportunity to invest in private equity through your 401(k), it's likely not a safe option.

"Retirees would get complex fee structures, added risk, and make them hold onto a long-term asset they may not understand," says Strachman.

Dividend stocks

Some retirees consider dividend stock as a relatively safe investment due to the income stream created. But there's still some risk involved.

"They feel like income instruments, but they're still equities," says Kassam, "Prices can fall, and dividends aren't guaranteed."

In the worst-case scenario, dividend stocks can lose value and stop paying dividends at the same time.

Target date funds

"Many people assume target date funds become fully conservative at or near retirement, but most still contain a large exposure to stock," says Jason Fannon, CFP® and senior partner of Cornerstone Financial Services.

Fannon continues, "Although this growth exposure can help combat inflation, it can also lead to significant declines in downturns, and those losses become locked in when retirees make withdrawals for everyday expenses."

Bottom line

Having your money invested in the wrong asset is one of the most common financial mistakes. The good news is that it's possible to readjust your investment portfolio. If you're not happy with where your portfolio sits today, consider making some adjustments.

For anyone who isn't sure what adjustments should be made, it might be worth talking to a financial advisor for guidance on your unique situation.