Retirees Be Warned: This Risky Investment Could Quietly Drain Your Savings

With the number of successful public corporations growing every day, investors often lament not investing in companies when they were just getting started. Google is often the poster child for this type of thinking, as investing $1,000 into the company when it went public would have returned investors tens of thousands of dollars more than their initial investment. Keen on helping individuals not miss the next Google or Apple stock, startups are providing investors with opportunities before they even go public through Simple Agreement for Future Equity (SAFE) investments. For retirees, it can sound like a solid backup plan if initial retirement plans are not panning out. However, according to the U.S. Securities and Exchange Commission (SEC), these agreements may not provide the return investors are hoping for.

A SAFE is an investment contract offered by a company where investors are promised future equity in exchange for providing financing. Although it can sound like a simple way to invest in the next tech giant, these agreements are not as simple as their name suggests. In fact, according to the SEC, SAFE agreements do not guarantee future equity, potentially leaving your initial investment in limbo.

While a SAFE may sound like the perfect investment for individuals looking to catch up in retirement, its nature may expose retirees to far too much risk to be worthwhile. Unlike investing in businesses, SAFEs provide a discount price, making it tempting for retirees to grow their savings without a large lump sum investment. But for your initial investment to pay off and convert to actual equity, specific triggers outlined in the agreement would need to occur. For example, a company may only provide SAFE investors with equity if they are acquired or have an initial public offering. If such events are not triggered, investors may get nothing in return for their initial funding.

For retirees, this investment also presents another major problem. There is no maturity date for when the initial investment is converted into equity, creating a possible scenario where retirees may not live long enough to see the outcomes of their SAFE investments. Because of the risk, retirees should avoid SAFEs. Similarly to buying a second home while in retirement, these agreements can make you bleed money. After all, there are several other investment opportunities that make sense for retirees. For example, municipal bonds and real estate investment trusts can provide stable income in retirement, while keeping a good portion of exchange-traded and index funds can still provide solid growth.