How do you use gold in retirement?
The current economy poses many challenges to retirees and those nearing retirement. While interest rates are up, inflation is cutting into purchasing power, and stock market volatility has made investing difficult for those looking for stable returns.
Meanwhile, issues like bank collapses in 2023 and geopolitical uncertainty have caused some investors to get concerned. That's not to say that all is bad. For example, after U.S. GDP slipped in the beginning of 2022, it's been in positive territory for the past few quarters.
Still, average retirement balances in the first quarter of 2023 sit below Q1 2022 levels, according to Fidelity. The average 401(k) balance, for example, is $108,200 as of Q1 2023, down from $121,700 the previous year.
The good news is that retirement balances in 2023 are up slightly compared to the end of 2022, so the tide may be turning. But retirees still might be looking for ways to better insulate their portfolios. One way to do so could be to incorporate gold investing in retirement.
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How do you use gold in retirement?
Some of top reasons to use gold in retirement investing include the following:
To increase diversification
One of the top reasons to invest in gold in retirement is to increase the diversification of your portfolio. Doing so can potentially smooth out returns and reduce the risk of large losses. That's important for retirees who rely on their portfolios for consistent retirement income.
"I like looking at my portfolio the way I look at a basketball team. Each asset, like each player in a team, has a role to play," says Collin Plume, CEO and co-founder at Noble Gold Investments.
Assets that generate dividends, he says, are like the scorers on a team. Then there can be a riskier pile, such as new business ventures or crypto, which can be volatile but have high potential, like a rookie. Lastly, assets like gold serve as a hedge, similar to defensive players or even backups.
"They don't always score the most points, but when all else fails, they take over," says Plume. "Don't count on it to give you dividends, but when the rest of the economy fails, there's that asset whose value remains steady. Gold is my favorite because it has historically gone up during or right after a period of distress."
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To gain stability via a gold IRA
Related to the benefits of diversification, gold investing can potentially bring more stability to retirees. And if you want to hold physical assets as a potential store of value, you can do so via a gold IRA.
"Gold IRAs allow you to hold physical gold as part of your retirement portfolio and are also sometimes referred to as precious metal IRAs. The gold can be held in different forms, including coins or bars. You can also hold other approved precious metals such as silver or platinum," explains David Rosenstrock, CFP, director at Wharton Wealth Planning.
Keep in mind, however, that gold IRAs are subject to similar retirement laws as traditional IRAs.
"A gold IRA has many of the same rules, including contribution limits and withdrawal requirements, as other IRAs," says Rosentstrock. However, investors can potentially contribute larger amounts by completing a rollover from a traditional IRA into a gold IRA.
Doing so can be seen as a way to essentially freeze the value of your portfolio, says Plume. To be fair, gold and other precious metals are not immune from price declines. Traditionally, however, these assets are used for their stability and are seen as a relatively good store of value.
To use as an alternative to stocks and bonds
Another reason to invest in gold in retirement is if you're looking for an alternative to stocks and bonds, either in terms of getting uncorrelated returns or simply choosing an asset that you're more comfortable with.
"Gold will typically have a low correlation to those two more conventional asset classes," says Chris Kampitsis, CFP, financial advisor at Barnum Financial Group.
This potential benefit can be similar to the advantages of diversification, but they're not necessarily one and the same. While you might diversify by holding multiple stocks, rather than investing entirely in one company, these assets might generally move in the same direction, i.e., be correlated. In contrast, with uncorrelated assets, as one drops, the other might rise. So gold can help balance your portfolio.
Plus, some people are wary of traditional investments like stocks and bonds.
"The reality is that as more people develop a distrust for the volatility of the publicly traded markets or get disenchanted with Wall Street, alternatives like gold become increasingly attractive," says Kampitsis.
That doesn't necessarily mean you should overreact to market fear. But "it is absolutely reasonable to include gold as part of a diversified portfolio," he says. Gold is "a less correlated asset that you can potentially turn to when stocks are in a trough."
To protect against economic crashes
Lastly, gold investing in retirement could be used by retirees looking for protection against economic crashes.
Here too, there's no guarantee how gold prices will respond to different events, such as with the mix of difficult conditions that have come up over the past year or so. So, it's important to be realistic about gold's performance as an asset, while keeping in mind that many investors use gold as somewhat of a safety net.
"While recent history suggests this may not be the case, the traditional thinking is that gold will outperform in periods of high inflation and is considered a safe haven in periods of economic distress," says Kampitsis. "Gold performed admirably during the Great Recession in 2008 and 2009 but provided mixed results last year during a period of exceptional inflation and frustrating equity returns."
The bottom line
These are a few of the many reasons why investors might turn to gold investing in retirement. Keep in mind that not everyone uses gold in the same way, nor is it the only option for those looking for a safety net.
For instance, Rosenstrock says that while "gold is usually a good store of value during turbulent times, in general, I would prefer to be in cash and money market categories instead of gold."
That said, cash and money market funds might not always keep up with inflation as well as gold, so it depends on factors like your risk tolerance and trust in gold. If you do decide to invest in gold, it's also important to consider how much to invest.
"One rule of thumb is to limit gold to no more than 5% to 10% of your portfolio," says Rosenstrock. "Depending on your risk profile and circumstances, some may decide to use a larger or smaller amount of gold in their portfolio."
