How to do #FinLit When your Time Horizon is Short
At 31, most people in my community are between the ages of 20 and 40, which means most of our time horizons (aka time until retirement) are pretty long. It’s not too hard to teach people how to prep for a retirement that is 25-45 years away or even to save for a house or a family that is years in the future. However, I recently got the opportunity to teach a class to individuals between the ages of 50 and 70, and ooof, that’s a lot harder.
What I realized was there’s like… 1 article on becoming financially literate at 50+ for every 20 articles on financial literacy as a young person (I made that stat up, don’t quote me). So I’m doing my part to increase that to 2 in 20. Let’s chat about how invest when your time horizon is lower than you’d like for it to be.
High-Yield Savings Accounts
Of course I’m going to start with the high-yield savings account. Do you even know me? The high-yield savings account is my favorite part of the personal finance world right now. They’ve been around for 20+ years but it’s only in the last year or two that they’ve reached yields of 4-5% and up. When you put your money in a bank that has a high-yield savings account, you receive over 10x more than in a regular savings account. No matter where you are in life, a high-yield savings account is always a great idea because it allows you to make money just for keeping your money in the bank. It’s a completely safe and consistent way to beat inflation!
Money Market Account
A money market account is very similar to a high-yield savings account. It’s like a savings account with a higher guaranteed yield (aka the money you’re given for keeping your money at that institution). Traditionally, money market accounts have had higher yields than savings accounts. These days, the yield is very similar. However, high-yield savings account yields are dependent on the Federal Reserve rate cuts/increases. That means the yields on these accounts could increase but they also could (and likely will, eventually) decrease to the more typical 1-2%. If and when that happens, a money market account will likely go back to being the better choice for a higher yield.
If you’re closer to retirement than you’d like to be, a money market account is a good option for a safe place to keep and grow your money at a rate that is slightly higher than inflation.
Certificates of Deposit
A Certificate of Deposit (CD) is a type of savings account that offers a fixed interest rate for a set period of time, ranging from a few months to several years. Unlike regular savings accounts, which allow you to withdraw your money at any time, CDs require you to leave your money deposited for the entire term. In return, they typically offer higher interest rates. When the term ends, you can withdraw your initial deposit plus the interest earned. CDs are a safe and reliable way to grow your savings, especially for those who don’t need immediate access to their funds.
Annuities
An annuity is a financial product that provides a steady stream of income, typically for retirees. You invest a sum of money with an insurance company, which then pays you back through regular payments over a specified period, which could be a set number of years or for the rest of your life. Annuities can help ensure you don't outlive your savings, offering financial security in your later years. There are various types of annuities, including fixed, variable, and indexed, each with different features and benefits to suit your retirement needs.
Bonds
Bonds are essentially loans that you, as an investor, give to governments, municipalities, or corporations. In return, the issuer promises to pay you periodic interest payments over a set period and to return your principal (the original amount you invested) when the bond matures. Bonds are considered a lower-risk investment compared to stocks, making them a popular choice for preserving capital and generating steady income, especially for those nearing or in retirement. They can help diversify your investment portfolio and provide a more stable financial foundation
Robo-Advisors
If you want the benefits of investing but don’t want the work, look into robo-advisors. Robo-advisors are online platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. By answering a few questions about your financial goals and risk tolerance, the robo-advisor creates and manages a diversified investment portfolio for you. They use advanced algorithms to monitor and adjust your investments based on market conditions and your personal preferences. Robo-advisors are a convenient and cost-effective way to invest, making professional financial management accessible even if you’re not an expert in investing. This can be especially useful for those who prefer a hands-off approach to growing their savings.
Here are links to robo-advisors at 3 of the biggest brokerage firms:
Fidelity: Fidelity Go
Vanguard: Digital Advisor
Charles Schwab: Intelligent Portfolio
Just because you got a late start doesn’t mean you’ve failed or even that you’re way behind. The key to successful investing at any age is to make informed decisions and stay committed to your financial goals. With a solid plan you can build a portfolio that aligns with your retirement dreams. Remember, it's never too late to take control of your future and ensure a comfortable and secure retirement!
