Retirement Planning? ETFs Can Help

April 2nd at 1:00pm by Tom Lydon

Baby boomers who are considering retiring and living off of an IRA account have plenty of options these days, due in part to the various exchange traded funds available. These funds can help keep investment expenses down while boosting returns.

“Let’s say you plan to withdraw an initial 4%, or $60,000, from your $1.5 million at age 65 and then increase that amount for inflation each year. And let’s further assume that your annual expenses run 1.5% a year, a ballpark figure for people who invest in mutual funds and the like,” Walter Updegrave for CNN Money wrote. “Reducing your investment costs by half a percentage point to 1% a year can lower your probability of running through your savings before age 95 by roughly 25%.”

A focus on lowering investment costs while driving higher returns is a combination that pays off in retirement, just as much as during a career. The combination can reduce the potential to run through a savings or retirement account all too soon, reports Walter Updegrave. [ETFs Can Offer Index Investors More]

Within a low cost ETF account of an IRA account that uses low-cost index funds, a reduction of investment expenses of up to 1 full percentage point, or 0.5%, is possible. The chance that a savings or retirement account will be exhausted in 30 years will drop in half. [ETFs: Coming to a 401(k) Plan Near You]

Of course, this combination is entirely theoretical and a total copy of this scenario cannot be guaranteed. Nobody can be sure that getting a full percentage point as an extra gain for each percentage point reduction in expenses can happen.

An example of an ideal retirement account, with a 60% stocks, 40% bonds allocation can be split up between these ETFs:

  • Vanguard Total Stock Market (NYSEArca: VTI) which is a broad market ETF, mixed with the Vanguard Total Bond Market ETF (NYSEArca: BND) gives a highly diversified portfolio of U.S. stocks with corporate and government bonds. [Vanguard Wins This Round in the ETF Price War]
  • For those investors that want overseas exposure, adding a 10%-20% allocation to a total international stock ETF fund such as the Vanguard FTSE All-World ex-US ETF (NYSEArca: VEU) gives both developed and emerging market allocations.

Basically, choosing ETFs with a low expense ratio and keeping investment fees and trades down can help preserve the principle that goes into a retirement portfolio.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.