ETFs for Retirement: A Guide for Retirees

Investing in retirement requires a balance of strategies, including income for the short term and growth for the long term. The right types of ETFs built into a diversified portfolio can accomplish both strategies. 

Learn about the best types of ETFs for retirement and the advantages they provide. 

What Are ETFs? 

ETFs are exchange-traded funds that hold other investment assets, such as stocks or bonds. Most ETFs passively track the performance of a benchmark index, such as the S&P 500. Put simply, an ETF is a hybrid of a stock and a mutual fund. Like stocks, ETFs trade intra-day on an exchange, and like mutual funds, ETFs are pooled securities. 

Are ETFs a Good Investment for Retirees? The Pros and Cons 

The key benefits of ETFs, such as simplicity, diversification, low expenses and tax efficiency, can make ETFs a sound investment for retirees. Short-term income generation and long-term growth are other potential benefits for retired investors. As with any other investment decision, investors should consider both the pros and cons of investing in ETFs before buying them. 

The Pros of Investing in ETFs for Retirement 

The pros of investing in ETFs for retirement include: 

  • Simplicity: It's generally easier to build an ETF portfolio than it is to build a portfolio of stocks and bonds. Retirees can accomplish their investment goals with a relatively small set of ETFs, whether it’s diversification of assets, income, growth or a combination of objectives. Managing just a handful of ETFs, as opposed to dozens of individual securities, also makes ongoing maintenance relatively easy with ETFs. 
  • Diversification: An ETF can provide exposure to hundreds of stocks or other assets in one packaged security. Comparing ETFs vs stocks, an ETF that tracks the performance of an index of stocks will generally have less-pronounced price movements up and down. Thus, ETFs generally provide more stable returns stocks. 
  • Low expenses: ETFs generally have much lower expense ratios than mutual funds, and lower expenses generally translate to higher returns in the long run. Low fees ensure that more dividends and interest flow through to retirement accounts, which is important when living on a fixed income. 
  • Tax efficiency: Generally, ETFs have low turnover, which means minimal buying and selling of securities, keeping capital gains taxes low for taxable accounts. ETFs can manage investment inflows and outflows by creating or redeeming “creation units,” which increases tax efficiency. Some ETFs invest in securities, such as municipal bonds, that are tax-free at the federal level. 
  • Income generation: One of the primary purposes of investments in retirement is to produce supplemental income. Like stocks, ETFs pay dividends, and like bonds, ETFs pay interest to shareholders.
  • Long-term growth potential: A significant risk for retirees is outliving their investments. Since many retirees live for 20 years or more after retirement, growth ETFs can be an important part of long-term investing. For periods of 10 years or longer, ETFs that track the performance of a broad market index, such as the S&P 500, have outperformed most actively managed portfolios that invest similarly. 

The Cons of Investing in ETFs for Retirement 

  • Risk: ETFs are not risk-free investments, and there are times when even a diversified portfolio can produce negative returns, which was the case for 2022. For example, stock ETFs and bond ETFs were mostly negative in 2002. The worst-performing ETFs of 2022 were thematic ETFs, such as the Viridi Bitcoin Miners ETF (RIGZ), which was down more than 80% on the year. 
  • Lack of control: With individual securities, investors can choose the stocks and bonds to hold in a portfolio, whereas ETF investors are not able to select the stocks held in an ETF.

What Are the Best Types of ETFs for Retirement? 

There are multiple types of ETFs for retirement, but the best investments to buy for any portfolio are those that are suitable for the individual investor’s unique goals and risk tolerance. That said, retirees benefit from dividend ETFs and fixed-income ETFs, as well as ETFs that focus on a specific sector, such as real estate or utilities. 

Types of ETFs for retirement include: 

  • S&P 500 ETFs: seek to track the performance of the S&P 500 index, which includes 500 of the largest U.S. stocks, as measured by market capitalization. S&P 500 index funds can work well as a diversification tool and as a core holding for long-term growth. 
  • Total Market ETFs: track the performance of a broad market index capturing large segments of the stock market or bond market. For example, a total stock market index ETF may track an index, such as the Wilshire 5000, which consists of approximately 5,000 U.S. stocks in a range of market caps. There are also total bond market ETFs and total international stock market ETFs. 
  • Dividend ETFs: income-based funds that typically invest in stocks of companies that pay high or stable and growing dividends. ETF dividends may be paid quarterly, or at some other frequency, depending on the ETF.
  • Fixed Income ETFs: typically track an index of bonds, such as the Lehman Brothers US Aggregate Bond Index. Like bonds, fixed-income ETFs pay interest to shareholders. 
  • Sector ETFs: may track the index of a market sector, such as technology or health care. Typical sectors that are sought for their income-producing potential include real estate, utilities, energy and financials

Bottom Line 

ETF benefits, including simplicity, low expenses and tax efficiency, make ETFs a worthwhile investment for retirement. Popular types of ETFs for retirement include dividend ETFs, fixed-income ETFs and real estate ETFs. Ultimately, choosing the right kind of investments for any portfolio depends on the investor’s unique financial goals and risk tolerance. 


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