Wall Street Investments Retirees Might Want to Reconsider 

Not sure where to put your retirement savings? There’s certainly no shortage of financial professionals’ hawking ideas; but whether these ideas are actually good ones is another story. Let’s take a look at the seven investments retirees may want to reconsider. 

1. Variable Annuities

Variable annuities are one of the reason annuities got a bad reputation. These complex annuities are a mixture of insurance and investment. Those who sell them will tell you they’re a great way to save for retirement. We’re here to tell you they might not be. 

Variable annuity pitches woo people with the promise of high returns and the potential for guaranteed lifetime income. However, the devil is in the details, and variable annuities are notoriously known for their lack of transparency. Those who fall for variable annuities are often shocked to learn of the heavily layered fee structure—which kills any high returns and makes losses all the more painful. Worse, the punishing withdrawal penalties make it difficult to exit.

2. Whole Life Insurance

If you need life insurance, you’re likely better off with term life insurance. That’s because whole life insurance carries higher premiums, commissions, and fees. For this reason, the popular advice has been to buy term and invest the difference of what you would have spent on whole life in the market for a better return. 
 
That said, some people like whole life insurance as a vehicle for transferring wealth to the next generation. Whether that’s a good solution for you depends on your savings, goals, and tax situation. It’s best to consult your retirement planner to crunch the numbers.

3. Target Date Funds

Target date funds are like one-size-fits-all clothing; they’re not going to fit everyone as well as they could. Yet, target date funds have benefited from excellent marketing. Solidifying the impression that investing in one is always a good fit to get you to your goal by the stated date. The truth is, no one can control the market, and chances are it won’t cooperate simply because it’s your time to retire. This reality has led to criticism of target date funds for underperformance and high fees that undercut returns.  As a rule of thumb, if your target date fund has fees in excess of 0.5 – 1%, it might be time to consider other options.

4. Company Stock in Your 401k

We probably don’t have to explain the importance of diversifying your investment portfolio. Yet despite this being a widely accepted best practice, many people have a blind spot when it comes to their company stock. Remember: your livelihood is already dependent on your employer. You may not want to tie up a portion of your life savings with them, too. If you currently have company stock, consider replacing it with other investments that align with your goals to avoid overexposure.

5. Mutual Funds

When it comes to maximizing long-term retirement savings growth, there may be better options than a mutual fund. Why? Actively managed mutual funds tend to have higher expense ratios, commissions, marketing fees, transaction fees… the list goes on. All of these costs add up, eroding your return. Over a lifetime the amount of money lost can be significant.  
 
So, why all the fees? Mutual funds have a lot of overhead to pay, from the manager who picks the funds to the person who sold it to you. That’s a lot of layers; and truth be told, you just don’t need them. Investment funds and ETFs, for example, could give you the performance you desire without the extra costs. 

6. Stable Value Funds

Stable value funds are portfolios of bonds that have insurance to protect against loss of capital or decline in yield. On the surface, that might sound like a nice, low-risk investment, but there’s more to the story. The value isn’t actually guaranteed. 

As you may know, bonds and interest rates have an inverse relationship: when interest rates rise, bond prices fall, and vice versa. Theoretically, if a stable value fund’s bond investments lose value, the insurance should pay up, canceling out the loss. But there have been instances where insurance companies have defaulted on their obligation. Further, funds are still subject to market value adjustments, which can result in a loss for withdrawing investors; that is, if you can withdraw at all. In some instances, the fund may restrict withdrawals to preserve liquidity, which could prevent you from rebalancing your portfolio precisely when it’s needed most.  

And finally, much like mutual funds, stable value funds have a lot of overhead that leads to higher-than-average fees. The insurance that’s supposed to provide peace of mind comes at a cost that will ultimately eat into your returns. 

7. Leaving Money in Your Old 401k Plan

Lastly, if you’ve moved on from your old job, don’t forget to take your money with you. It may seem like the simplest option to leave it untouched, but you’ll be sacrificing control and potentially higher returns. 

Though it may not be immediately apparent, in many cases you’ll pay higher maintenance and administrative fees as a former employee in your old plan. Plus, you’re inadvertently restricting your investment options as most employer-sponsored plans have a limited menu.  

By contrast, rolling over your funds into an IRA couldn’t be easier. The fees will likely be lower, and you’ll have more freedom to select the investments that work best for you.  

Navigating the “do’s and “don’ts” of retirement investing can feel like a full-time job. But with a Roadmap for Retirement ℠, you can feel confident you have the right plan and team looking out for you. With all that free time, imagine what you could do! 

Disclaimer: Numbers are for illustrative purposes only. Consult a professional for personalized advice.