6 Investments Retirees May Want to Avoid—and What to Do If You Already Own Them
- Joe Boughan
- Aug 28
- 7 min read
There are plenty of articles about investments retirees should avoid.
That advice can be helpful BEFORE you buy something. It is less helpful when the investment is already sitting in your account.
At that point, the question is not simply whether the investment is good or bad. You also need to understand what it is doing, what it costs, and what would happen if you sold it.
Taxes may be due. Surrender charges may still apply. You may lose an insurance benefit that is difficult to replace. In some cases, getting out can do more immediate damage than keeping the investment.
That does not mean you should ignore a problem. It means you should understand the whole decision before making a change.
Before You Sell an Investment, Ask These Five Questions
When I review an investment, I generally want to understand five things:
What job is it supposed to do? Is it there for income, growth, insurance, downside protection, or diversification?
What does it really cost? This includes fund expenses, insurance costs, commissions, advisory fees, and less obvious costs.
What risk did you accept? You may have limited your upside, concentrated your wealth, or given up access to your money.
What would it cost to leave? Taxes, surrender charges, lost benefits, and timing all matter.
Is there a simpler way to do the same job? Complexity should have a clear purpose.
These questions help separate an investment that is merely unfamiliar from one that is expensive, unnecessary, or poorly matched to your retirement plan.
1. Covered-Call ETFs: A Distribution Is Not the Same as a Return
Covered-call ETFs are often marketed around their distributions. A fund might distribute 8%, 10%, or more over a year. Retirees see that cash entering the account each month, so it feels like dependable investment income.
The problem is that a distribution is not the same as a return.
These funds generally sell call options against stocks they own. The option premiums help fund the distributions, but selling those options can also limit how much the fund participates when the market rises. If the market falls, the fund may still experience much of the decline.
The distribution can also come from different sources. Some funds distribute investment income or realized gains. Others may distribute amounts classified as return of capital.
A fund’s Section 19(a) notice can provide more information. The required language explains that return of capital should not automatically be confused with yield or income. However, the classifications in these notices may be estimates, so they should not be viewed in isolation. Here is an example of a Section 19(a) notice filed with the SEC.
If you own a covered-call ETF, look at its total return, changes in net asset value, distribution sources, and tax reporting. Do not evaluate it based on the distribution rate alone.
2. Indexed Universal Life: Review the Policy, Not Just the Illustration
Indexed universal life insurance, or IUL, can sound like an ideal combination: permanent insurance, growth tied to a market index, protection from direct market losses, and potential access to the cash value later.
Permanent life insurance can serve a legitimate purpose. It may be appropriate for estate liquidity, special-needs planning, or another long-term insurance need.
The challenge comes when an IUL is presented primarily as a retirement investment.
The policy’s growth is subject to caps, participation rates, and other crediting rules. The cost of insurance and other policy expenses affect how the cash value grows.
Occasionally, I have heard insurance agents marketing loas against these policies at tax free income. It is true you can 'borrow; against your cash value without incurring a tax, but that loan could become taxable someday. And, ff you borrow against the policy, interest is charged, and the loan can affect both the cash value and death benefit.
Most importantly, an illustration is not a forecast. It shows how a policy could perform under a specific set of assumptions. The NAIC’s guidance on life-insurance illustrations explains how these standards have continued to evolve, including additional disclosure requirements in 2026.
If you already own an IUL, do not surrender it based on a general article. Request a current in-force illustration. Review the premiums paid, current cash value, surrender value, outstanding loans, insurance need, and what happens if you stop paying premiums.
The original sales presentation matters much less than the economics of the policy today.
3. Tactical Funds: What Are You Paying the Manager to Do?
Tactical funds can be called dynamic, flexible, managed-risk, or tactical-allocation funds. The names are different, but the general promise is similar.
A professional is watching the market. When conditions become dangerous, the manager can reduce risk. When the outlook improves, the manager can invest again.
It sounds comforting. The difficulty is that the manager has to make more than one decision correctly. Moving defensive only helps if the manager also knows when to reinvest. Additional trading and higher expenses create another hurdle.
Morningstar has documented the disappointing historical results of the tactical-allocation category, including the difficulty these funds have had delivering better returns or better risk-adjusted results than simpler allocations.
This does not mean every actively managed fund is a tactical fund or that all active management is worthless. It means the manager’s job should be clear.
What is the strategy expected to accomplish? Has it added value after fees? Is it providing something you could not obtain more simply elsewhere?
If those questions do not have clear answers, the word “managed” may be doing more work than the manager.
4. Company Stock: A Good Company Can Still Create Too Much Risk
Company stock is different from the other investments on this list because nobody necessarily sold it to you.
It may have accumulated through restricted stock units, an employee stock-purchase plan, stock options, company contributions, or simply years of working for the same employer.
That can create a risk that is easy to miss. Your salary, benefits, career, and investment portfolio may all depend on the same company.
One helpful question is this:
If you received cash instead of company stock today, would you use that much cash to buy your employer’s stock?
If the answer is no, holding the stock may be more about comfort or loyalty than an intentional investment decision.
Research from Arizona State University professor Hendrik Bessembinder found that the best-performing 4% of listed U.S. companies explained the market’s net wealth creation over the study period. Most individual stocks did not outperform one-month Treasury bills over their lifetimes. Arizona State provides a summary of the research here.
That does not mean your employer is a bad company. It means successful businesses and successful long-term stocks are not always the same thing.
Before selling, consider capital gains, vesting dates, trading restrictions, charitable opportunities, and whether the stock is held inside a retirement plan. Company stock inside a 401(k) can also create additional tax considerations that should be reviewed before a rollover. Parkmount has a separate overview of concentrated employee-stock risk.
5. Variable Annuities: The Surrender Decision Matters
Not every annuity is bad. A straightforward income annuity may help cover essential spending in retirement. Other annuities provide guarantees that can be valuable in the right situation.
Deferred variable annuities bought primarily for accumulation deserve a closer look.
These contracts can contain several layers of cost: insurance charges, investment expenses, rider costs, and surrender charges. The value of a rider may also be difficult to understand from an account statement alone.
The tax treatment is another consideration. A nonqualified annuity grows tax-deferred, but taxable gains distributed from the contract are generally taxed as ordinary income. That is different from the potential capital-gains treatment available to investments held directly in a brokerage account.
Tax deferral is also less valuable when the annuity is held inside an IRA or another account that is already tax-deferred.
If you own a variable annuity, identify its contract value, cost basis, surrender value, remaining surrender schedule, riders, and guaranteed benefits. These are not necessarily the same numbers.
Investor.gov’s variable-annuity guidance provides a useful overview of surrender charges and other contract expenses.
Sometimes surrendering the contract makes sense. Sometimes waiting for the surrender period to expire is better. And sometimes a benefit in the contract is valuable enough to keep. You need the actual contract information before you can know.
6. Alternative Investments: Complexity Is Not a Strategy
Alternative investments can include private credit, private real estate, private equity, art, litigation finance, and many other strategies.
Plenty of wealthy investors own alternatives. The problem is not the category itself. The problem is buying something because it sounds exclusive, produces an attractive projection, or appears less volatile than the stock market.
Private investments are often valued less frequently. That can make the reported experience look smoother even when the underlying investment still carries meaningful risk.
Before investing, you need to understand the operator, the underlying assets, leverage, liquidity, valuation process, total fees, and who gets paid for what. You should also know what must go right for the investment to succeed—and what happens if it does not.
We use alternative investments selectively in specific client situations. The purpose is not to beat the stock market or make a portfolio more interesting. The investment must fill a clear role that justifies the additional cost, complexity, and lack of liquidity.
If that role cannot be explained simply, the investment probably needs more review.
What Should You Do If You Already Own One?
Finding a questionable investment does not produce one universal answer. There are generally four paths to consider.
Sell or surrender it
This may be reasonable when the investment no longer serves a purpose, exit costs are manageable, and a simpler alternative can do the same job.
Unwind it gradually
Selling over multiple years may help manage taxes or reduce a concentrated position without creating one unusually large taxable event.
Stop adding new money
Sometimes the practical answer is to keep the existing investment temporarily but direct future savings somewhere else.
Keep it and review it later
An investment can be imperfect and still not be worth exiting today. A surrender charge, valuable insurance benefit, or immediate tax consequence may outweigh the expected benefit of making a change.
Massachusetts residents also need to consider the state’s additional 4% surtax. The 2026 threshold is $1,107,750 of taxable income. A large taxable gain could affect whether someone crosses that threshold, although the gross amount sold is not necessarily the amount included in taxable income. Massachusetts provides current surtax guidance here.
Taxes should not be the only reason to keep a poor investment. But they can affect how and when a change is made.
The Goal Is Not to Find Something Exotic
Every dollar in your retirement plan should have a job. You should understand what that job is, what you are paying for it, and what risk you accepted in return.
Sometimes a review uncovers a problem that should be addressed. Sometimes the right answer is to stop adding money and wait. And sometimes the answer is that you are fine and do not need to change anything.
This is not one-size-fits-all investment advice. The right answer depends on your taxes, retirement income plan, insurance needs, contract terms, and other investments.
If you would like an honest second opinion on your retirement plan or investment portfolio, you can schedule a free 30-minute consultation. We can look at what you own, what it is doing, and whether making a change would actually leave you better off.
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