A typical maxim of retirement portfolio management has many investors allocating a percentage of fixed-income assets equal to their age. However, with interest rates hovering near record lows and the senescent population living longer, retirees may have to turn to equities and stock exchange traded funds to meet their needs.
John Sweeney, executive vice president for retirement planning and strategy at Fidelity Investments, advises investors in their 50s and 60s to take on more risks than they normally would in a high interest-rate environment, Bloomberg reports.
“We’re asking folks to make sure they aren’t too conservative at a time when interest rates are so low,” Sweeney said in the article. “They need some portion of their savings growing, because they don’t know if they’re going to be running a sprint or a marathon as they age—and have to plan for the marathon.”
Arden Rodgers, who heads investment adviser Arbus Capital Management, also warned that retirees should not allocate to speculative, junk debt for the higher yields as the assets will also be at risk in a rising rate environment. Instead, investors should turn toward stocks to help bolster returns.
Alternatively, high-quality dividend-paying stocks can be an attractive substitute to low-yield bonds, and in the ETF space, investors have many options to choose from. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and has a 1.91% 12-month yield. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 2.58% 12-month yield. The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.2% 12-month yield. The ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) only includes companies that have increased their dividends for at least 25 consecutive years and offers a 1.57% 12-month yield. [Quality Dividend ETFs with Consistent Yields]
Moreover, cheap fees among many broad index-based ETFs help keep more returns in investor’s pockets. For instance, the Schwab U.S. Broad Market ETF (NYSEArca: SCHB) is the cheapest ETF offering with a 0.04% expense ratio and Vanguard Total Stock Market ETF (NYSEArca: VTI) has a 0.05% expense ratio. Looking at the dividend ETFs, VIG has a 0.10% expense ratio, SCHD has a 0.07% expense ratio, SDY has a 0.35% expense ratio and NOBL has a 0.35% expense ratio. [Efficiently Save Toward Retirement with Cheap ETFs]
While there is no consensus on how much investors should hold between stocks and bonds upon retirement now, retirees may be better off with a greater tilt toward equities. For example, among target-maturity funds for those retiring in 2015, a Fidelity portfolio showed a break down of a little over half of allocations in stocks and a Vanguard portfolio had an even split between stocks and bonds.
For more information on saving toward retirement, visit our retirement category.
Max Chen 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.