Where Should Boomers Put Their Money Now?

When it comes to saving for retirement, there's no single best approach or sure thing. Instead, there's a dizzying array of paths, possibilities, and pitfalls and for those closest to retirement, the stakes are high. The choices made in the final years before leaving the workforce can have an impact that lasts decades.

Cheapism spoke with financial advisers across the country about where baby boomers should put their money now to protect their nest egg and create income for the future, and they provided some interesting options boomers might consider discussing with their own advisers.

Boomers should steer clear of the stock market, says William R. Borton, managing principal at New York-based W.R. Borton & Associates. "Stock valuations are at an all-time high and fixed income yields are expected to remain below 2 percent for the foreseeable future," says Borton. "A correction is inevitable, but when, and how severe, are unknowns." Borton instead suggests deferred-fixed or fixed-index annuities with income riders. These are contracts with insurance companies that guarantee principal, defer taxes, pay a modest interest rate, and can be turned into a guaranteed lifetime income.

A form of investing that rose to popularity after the financial crisis left many banks with limited ability to provide loans, real estate debt funds involve a group of private lenders providing money for real estate collateralized loans to qualified borrowers. These loans are made, for example, to construction companies that are building homes or to other businesses, said Allan Dill of Jacksonville, Florida-based RealtyeVest. Often, the business pays interest on the investment and at the end of the term, repays the investors in full, explains Dill. The holding period for this type of investment is short, some only one or two years, making it easy for investors to quickly generate passive income, said Dill. The average annual interest rate on such investments is about 10 percent.

An equity investment involves pooling money with other investors and providing funds to a business for partial ownership, explained RealtyeVest's Dill. "The business owners manage the business and provide a percentage of all profits to reach a targeted investment return," he said. Real estate investment trusts (REITs) must pay 90 percent of their profits to investors, unlike stocks, which have no requirement to pay dividends to investors. This can generate returns up to 25 percent or more, Dill said.

Any goal-based investing needs some level of predictability, said Mark Struthers of Sona Financial in Minnesota. The question is how to plan for possible inflation over a long horizon without taking on too much risk. Struthers' approach involves a mixture of fixed-maturity bonds, exchange-traded funds, and Treasury Inflation Protected Securities, or TIPS. TIPS, issued by the federal government, increase in value if inflation goes up. Struthers often uses these in conjunction with the other two. "I often use a barbell-type approach," says Struthers. "I ladder them out so that I know I have a set amount to reinvest if we get inflation. I decrease the chance of being trapped in a bond fund while I lose purchasing power and principal. If rates do go up, I reinvest at the higher rate."

For boomers who feel they've accumulated enough wealth for retirement but would still like to participate in the market, Andrew Almeida of New York-based Almeida Investments suggests market-linked CDs (also known as market-indexed CDs). "These products can offer principal protection when held to maturity, or even a minimum annual return like 0.5 percent to 1 percent, and are also linked to a basket of equities," said Almeida. These CDs are often linked to an index like the S&P 500. The benefit of investing in them is that they combine the long-term growth potential of equity or other markets with the security of a traditional certificate of deposit. The downside however, is that the CD terms are anywhere from five to seven years, so it's not a liquid investment.

Michael Landsberg, partner at Punta Gorda, Florida-based Landsberg Bennett Private Wealth Management, favors cheaper assets for his clients who are boomers. This means investing in emerging markets where the cost to buy is much less expensive than investing in U.S. stocks. "Cheaper assets represent better downside protection as well as better upside potential," he explains. "Boomers have to be concerned with longevity risk more than fluctuations in value in their portfolio over the short term. Underestimating their holding period is a common mistake we see boomers make because they truly do not understand they may be retired 30 or even 40 years." Landsberg recommends accessing emerging market investments via mutual funds such as Vanguard's Emerging Markets Stock Index or the Delaware Emerging Markets Institutional Class fund. These offer a basket of stocks, allowing investors to diversify away much risk.

For those not interested in pooling their money in a real estate debt or equity investment, there's always traditional real estate purchases, which Kevin Huhn, a Canada-based business growth strategist and consultant recommends. "For years, we all have come to know that real estate is a sound investment long term," says Huhn. When purchasing real estate as an investment, the well-known rules apply, he says. In other words, buy low, and sell high. Huhn also suggests carefully reviewing risk and reward. When considering risk, think about what work needs to be done on the property. As for reward, determine whether the property will be a revenue-generating unit. Will you rent it out? And how much do you realistically stand to earn?

There are two types of individual retirement accounts, or IRAs: traditional and Roth. The traditional IRA offers a tax deduction for the tax year in which the contribution was made, and when the money is withdrawn in retirement, you will need to pay taxes on it. A Roth IRA, however, is an after-tax investment that can be withdrawn tax-free in retirement. For those who want to avoid the hassle of paying taxes on an IRA distribution in retirement, David Bakke, finance expert from Money Crashers, suggests shifting their money to a Roth now. "If you can handle the expense now, a conversion from a traditional to a Roth IRA is another option, simply for tax purposes," he said.

Precious metals have been an effective store of wealth for more than 5,000 years, says Bill Stack, founder of Stack Financial Services. Gold for instance, is beating the Dow and the S&P 500 so far this year, Stack said. "As an example of why a person might want to own a little gold, when I was born, gold was $35 an ounce -- $3,500 would purchase 100 ounces of gold," Stack explained. "If you had $3,500 cash in one box, and 100 ounces of gold in another, and pulled them out today, you would still have $3,500 cash in one, and $135,000 (same 100 ounces of gold) in the other." The current price of gold is about $1,320 per ounce. It's also possible to purchase securities related to precious metals such as gold or silver, a less cumbersome approach for investors who prefer a traditional account.

Ilene Davis, a Cocoa, Florida-based adviser and author of "Wealthy by Choice: Choosing Your Way to a Wealthier Future," advises boomers to have enough money in a money market, or in cash, to cover the first three to five years of retirement. "The reality is that the biggest problem for a retiree is if they are invested in equities (stocks) and the market drops a lot just before they are ready to retire. It changes all the calculations," explains Davis. This approach helps retirees avoid having to sell stocks at a loss if they need money during a time when there is a downturn in the market.

Unit investment trusts are an investment that's something of a cross between an actively managed fund and a set portfolio of investments. Investopedia describes them as "an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time." The benefit of these trusts is that they're designed to offer capital appreciation and dividend income. And at the end of the trust, investors can receive cash equal to the net asset value of the units. UITs are often issued for a fixed term, such as one to two years. In addition, they can be as liquid, or easy to trade as many mutual funds.

As the name indicates, life-cycle funds almost mirror the life cycle of the investor who holds them. In other words, these funds are designed to change over time, becoming less risky with their investments as their investors age. Often such funds have a target date in their title -- for instance the Vanguard Target Retirement 2025 Fund, which means it's designed for those reaching retirement between about 2023 and 2027. Why are life-cycle funds a good choice? They're a one-stop holding for decades. On the first day of their existence, the funds have the highest risk level they will ever have. But over time, they shift focus to income generation and capital appreciation, scaling back their stock exposure.

For those who truly want to steer clear of the stock market, one final option involves putting your money in such things as paintings and other fine art, classic cars or sports memorabilia. The key is to have a great deal of knowledge in the investment option you choose. In addition, it's a good idea to limit your exposure, putting no more than 5 to 10 percent of your net worth into such an investment vehicle. And finally, keep in mind that these types of investments have drawbacks, such as liquidity -- the ability to cash out quickly -- and that they require physical protection, insurance, and more.