6 Most Safe Investments for Baby Boomers

Baby boomers are leading the charge of the new retirement reality. With only 10 percent of boomer-aged workers expecting income from defined-benefit programs, the onus of retirement financial planning has shifted largely to the individual. Meanwhile, life spans and health care costs are on the rise. According to Fidelity, a 65-year-old couple that retired last year needed $220,000 to cover health care costs.

To sustain a comfortable standard of living throughout their retirement years, boomers need to grow their wealth with low-cost investments that offer regular returns and tax advantages while minimizing short-term risk. But, not every investment portfolio should be the same among boomers.

“Investments that are safe to one person may not be for another,” said Patrick Hejlik, CEO of Fourth Quadrant Asset Management, an investment consulting firm that works with Baby Boomers transitioning from pre- to post-retirement. “It really depends on how long they need the assets to work for them, how close to retirement they are, health status and risk tolerance.”

One of the keys to a successful investment strategy is diversification. By creating a diverse mix of the following safe investment options, boomers can enjoy security while achieving sufficient growth to last throughout their golden years.

Safe Investment No. 1: Index Funds

Index funds are safe investments aggressive enough to provide strong returns. These funds are a type of mutual fund constructed to match or track the components of a market index, such as the S&P 500.

Paul Ruedi, CEO of Ruedi Wealth Management, Inc., recommends these funds as they offer risk-reducing diversification at a low cost. The hands-off nature of index funds allows operating expenses to remain low. In 2013, CBS MoneyWatch reported that average index fund fees come in around 0.13 percent, compared to the average 0.93 percent fees on actively managed funds.

When considering relative costs and returns, index funds steadily outperform their actively managed counterparts. “Index funds allow an advisor to create the most reliable financial plan,” said Ruedi. “Actively managed funds must increase uncertainty by their very nature — they can and usually do underperform.”

Ruedi recommends the Vanguard Total Stock Market (VTSMX) Index Fund for boomers’ equity allocation; it provides a low-cost, safe investment option with a reliable delivery of return.

Safe Investment No. 2: ETFs

An ETF is also a safe investment strategy that can serve boomers’ interests. These funds can be traded on an exchange like stocks, allowing boomers to get invested in a variety of asset classes — stocks, bonds, real estate — without having to shoulder the expense of trading each stock individually.

Like index funds, ETFs track indexes. But unlike index funds, ETFs tend to have more options and greater liquidity. ETFs also have low expense ratios, with some brokerages like Charles Schwab and TD Ameritrade offering select ETFs commission-free, reducing expenses even further for cost-conscious boomers.

Read: The Best Investment Advice From Buffett and 11 Other Investors

Safe Investment No. 3: Blue-Chip Dividend Stocks

Mike Scanlin, CEO of Born To Sell, recommends boomers invest in “high-quality stocks that are stable and provide reliable dividend income.” These large, stable company stocks — like Johnson and Johnson (JNJ), Walt Disney (DIS) and Pepsi Co (PEP) — are also known as blue-chip stocks, many of which pay dividends.

Blue-chip dividend stocks are not only attractive to boomers because of the regular income they provide; they’re appealing because of their overall performance. Over the last four decades, dividend stocks have outperformed the S&P 500 by 2.5 percent annually, reports The Street.

Buying stocks individually requires paying a transaction fee with each buy and sell. To keep costs low, compare fees at various brokerages and make sure your predicted gain will be more than enough to cover the transactional costs ($5 to $10 at discount brokerages).

Safe Investment No. 4: Peer-to-Peer Lending

For boomers already holding a great deal of their portfolios in the stock market, certified financial planner (CFP) and owner of GoodFinancialCents.com, Jeff Rose, recommends safe investing through peer-to-peer lending.

“Sites like LendingClub.com and Prosper.com give you the opportunity to invest in loans to people and small businesses while giving you credit and investment risk information. You can invest as little or as much as you want into any one ‘note,’ allowing you to diversify inside of the  peer-to-peer lending network,” said Rose.

Chartered Financial Analyst (CFA) and founder of PeerFinance101.com, Joseph Hogue, also recommends peer loan investing for boomers, as these loans “are not closely correlated with stocks, providing some protections from market ups and downs. Since peer loans pay off completely over the life of the loan (three to five years), they provide more cash flow than traditional bonds that only pay interest until they mature.”

Related: 5 Perks of Peer-to-Peer Lending

Safe Investment No. 5: Annuities

Since very few boomers have pensions, CFP Shannon Ryan recommends annuity products for conservative boomers who’d like a “guarantee” of an income they cannot outlive. An annuity is an investment vehicle sold through an insurance company and one of the few investments that guarantees returns.

“Annuities are more expensive than many investments and do typically have a surrender fee schedule in the first 10 years,” concedes Ryan. “But when used appropriately in a balanced portfolio, they can add some confidence to the stability of income.”

Annuity costs vary depending on their structure, requiring careful review. In choosing an annuity, financial advisor Shannon McLay of Next-Gen Financial said, “The primary feature that I think people should look at when determining the best annuity for them is the guaranteed component. As long as the guaranteed payment is a number that would meaningfully contribute to their other regular retirement income, then it will work in their overall retirement strategy.”

Keep reading: 13 Types of Alternative Investments

Safe Investment No. 6: Certificates of Deposit (CDs)

Another option for conservative boomer investors are certificates of deposit (CDs). When you put your money into a CD, you agree to leave your money with the bank for the term specified on the certificate. In return for that time guarantee, the bank pays you a higher rate of interest than a typical savings account. Generally, larger deposits and longer timelines translate to better rates.

CDs don’t carry costs, but they do incur penalties if the money is withdrawn prior to maturation — which can range from a few months to a decade, depending on the CD.

Boomers looking to benefit from higher rates while still maintaining liquidity can use the laddering technique, whereby various CDs of differing rates and maturities are purchased so that investors can access their money at different times. Boomers can also try to arrange to have interest paid out quarterly or semi-annually to maintain increased liquidity.

Founder of Mom and Dad Money, Matt Becker, said, “CDs are great for short-term goals and for any money you might need access too soon.” Becker recommends local credit unions and online banks like Ally or Barclays for the best rates.

He does, however, caution against boomers keeping too much of their nest egg in these conservative vehicles. “The issue with CDs and savings accounts for long-term goals is that they will almost certainly lose value due to inflation. That’s why it pays to be a little bit more aggressive with your long-term savings.”

This article originally appeared on GOBankingRates.com: 6 Most Safe Investments for Baby Boomers

This article by Stefanie O’Connell first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.