It’s well-documented that millennials and Gen Z are big on exchange traded funds. Those demographics embrace ETFs for any number of reasons, including broad market diversification, access to thematic investments, tradability, and low fees, among others.
Data suggest retirees are joining the ETF party, too, and that could be to their benefit. A recent BlackRock survey indicates 37% of investors in the 70 and up demographic own ETFs. That’s well ahead of their baby boomer (27%) and Gen X (29%) counterparts, reports Christine Benz for Morningstar.
ETFs are on a torrid pace of asset-gathering this year, and with more folks retiring by the day, those flows could accelerate as workers depart employer-sponsored retirement plans. There are other reasons why retirees are flocking to ETFs.
“Older adults’ embrace of ETFs may have something to do with the fact that, as retirement approaches, many investors look at their portfolios with a fresh set of eyes and make adjustments accordingly,” notes Benz.
Additionally, some employer-sponsored plans may have limited options or menus better-suited for investors with long time horizons. In retirement, investors should be dialing back risk while generating income. Hundreds of ETFs accomplish those goals, many at near rock-bottom fees. In fact, the combination of favorable expense ratios and ease of income access makes ETFs a desirable destination for many retirees.
“For income-centric retirees, the small fees that index funds and ETFs typically levy ensure that more of their dividends flow through to shareholders. It’s all but impossible for more-expensive products with similar mandates to generate a competitive yield without taking on additional risk,” according to Benz.
Another reason why retirement investors may be embracing ETFs appears superficial on the surface, but in reality, it’s rather credible. Retirees are, obviously, done working. They want to enjoy their post-working lives. Maintaining sprawling investment portfolios can feel like work, but ETFs are relatively low-maintenance investments. That’s particularly true if an investor is holding broad market or core equity and fixed income solutions. With funds like that, retirees don’t have to worry about concentration risk, high fees, taxes, or fund manager performance.
Speaking of taxes, that’s another source of allure with ETFs for retirement investors. While work may be over, capital gains taxes are still important considerations for retirees. Actively managed mutual funds carry tax implications for end users, but capital gains usually aren’t passed on to investors in passive ETFs and index funds.
“Controlling taxable income in retirement doesn’t just have the potential to lower your tax bill; it may also reduce the extent to which your Social Security income is taxed and reduce your susceptibility to Medicare premium surcharges that apply to high-income Medicare enrollees,” adds Benz.
For more on income strategies, visit our Retirement Income Channel.
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.