ETFs For Retirement

Have you ever read something then paused and said well that’s stating the obvious? Then upon further reflection realize what is obvious to you may not be obvious to others. This happened to me recently as I was scanning some retirement headlines.

I came across Kimberly Palmer’s article titled “The Future of Social Security: Not Good“. My first response was ‘No duh!’ After giving it more thought, I came to the conclusion that my reaction is probably in the minority.

I suspect most people believe that the U.S. government will not let Social Security fail. This is the same government that deemed certain large companies ‘too big to fail’ and dragged other unwilling participants into the fray. BB&T’s (BBT) Chairman and CEO, Kelly King has been very outspoken on how the government has managed the TARP debacle. And now the government is ‘helping’ the auto industry. Watch out Detroit!

The U.S. government has become too big and too ‘helpful’ to the detriment of its citizens. The government should spend more time providing for the common defense and less time promoting the general Welfare (pun intended).

So, what are your retirement plans? Are you going to rely on the government to print your social security check and the money backing it up, or will you choose to take charge of your future and prepare for it? As it is with most things in life, those that prepare for retirement will find more success than those that don’t. It is really not that hard when you start young. Here are three simple steps:

1. Live on less than you earn. (another ‘No duh!’ statement)
2. Invest the rest using a sound asset allocation model.
3. Pick solid, conservative, low-cost investments.

Number 3. on first blush may seem complicated, but it doesn’t have to be. For those that don’t want to make investing their hobby, they can focus on a few good funds like Vanguard’s S&P Index Fund (VFINX) and Vanguard’s Long-Term Bond ETF (BLV).

For those a little more adventurous, a strategy based on an article by Richard Jenkins titled “A simple ETF strategy for beginning investors“ has been quite effective over time. Don’t let the “beginning investors” term scare you away. The goal of this portfolio is to provide diversification over a broad allocation of stocks and bonds by holding five ETFs: iShares Lehman Aggregate Bond Fund (AGG), iShares MSCI EAFE FD (EFA), Vanguard Total Stock Market ETF (VTI), iShares DJ Real Estate Index (IYR) and iShares DJ Basic Materials (IYM).

For those comfortable in selecting and holding individual stocks, there is nothing like Dividend Stocks to provide a growing income into the future. Dividend stocks found in many dividend investors’ portfolios include companies such as: McDonald’s Corp. (MCD) [analysis], Johnson & Johnson (JNJ) [analysis] and The Coca-Cola Company (KO) [analysis].

Finally, you can choose not to prepare. In June 2008, I wrote about a retirement-age couple that would never retire because they chose to life five on the edge and always spent a little more than they made. Over the last year the noose has continued to tighten on Bill and Jackie (not their real names). Due to the economy and health issues work has been hard to come by. Their house is one step away from foreclosure and on the market with no buyer in sight. Bill needs surgery and the family continues to grow weary of providing for them.

Life is a choice. You can choose how you live, but you cannot choose the consequences of how you live.

Full Disclosure: Long AGG, BLV, EFA, IYM, JNJ, KO, MCD, VFINX, VTI. See a list of all my income holdings here.

Comments

[Frankie62:]

Interesting article, but isn't it a little heavy on IShares? Since the IShares portfolio is being sold, can we assume they will have adequate management? What about percentages for each fund - equal? Could have also mentioned how often to check on your retirement portfolio. (Many forgot to do that in the recent fiasco.) Spending less than you earn is always a good idea - especially in retirement. Certificates of Deposite may be better than equities for some - the interest rates will be going up when the expected inflation arrives.

Jun 25 08:51 AM

[Emerald:]

Vanguard has a decent number of ETF's.

Jun 25 10:05 AM

[josepardinas:]

The government should get out of the business of invading half the world on a regular basis. Then, there will be money for Social Security.

The US has a military that is larger than all other militaries combined. We need to get rid of the notion that there is a chance we can conquer the world. That opportunity, if it ever existed, is long past.

Use the trillions of dollars spent on useless armaments and the stationing of a thousand all over the planet to give the citizens of the richest country in the world the security in retirement that even the most pissant little country in Europe normally (and without any fuss) provides.

Jun 25 11:45 AM

[notsosmart:]

richest country in the world? now theres a AAA statement.LOL

Jun 25 03:42 PM

[Living4Divi...:]

There are two problems with the VFINX/BLV strategy.

BLV - is Long-Term Bonds. And these are the types that will get hammered at first when inflation sets in, then as Fed raises rates to fight inflation , rates rocket up. This 1-2 punch will clobber the long end of the bond market.

I like Richard Jenkins ideas the most. “A simple ETF strategy for beginning investors“ None the less, AGG will get hammered by inflation

Jun 25 04:59 PM

[Jonas Zamora:]

One way I recommend is to divide your money into different pools. Pool #1 would meet your current expenses and pool #2 for longer term investing(equties/hedg...

For example, if you have $1million, and need $50,000 a year income, put $50,000 in a money market for current year needs and $450,000 in laddered CDs, laddered fixed income. Every year there will be $50,000 plus interest available for 10 years. That is pool #1.

The 2nd pool would be $500,000 in actively managed equities(hedged when needed). You would allow this to grow over the next 10 years and use it to replenish your income portfolio.

Outside of this money, you may consider other types of risk management to manage emergencies like health care, unemployment, or disability.

Is this a perfect solution? Nothing is perfect, but it would give you better odds in not outliving your money and preserving capital in unforseen emergencies.

Jun 25 05:23 PM

[bcncv:]

This brings up an interesting question. What should the average American assume Social Security will be worth in the future? This is a critical question for retirement planning. On one hand, it won't completely disappear. The politics of the issue are too strong. On the other hand, the laws of reality dictate that it can't exist in its current form forever.

Personally, I assume that Social Security will grow at half the rate of inflation when planning my retirement in 35 years. I realize that this is completely unpredictable, but I am curious as to how other people are planning. What is everyone else out there planning for, SS wise?

Jun 25 07:36 PM

[Living4Divi...:]

Jones - you are saying to put one half in bond-like investments ? That is great if you plan to live only 10 more years.

If we have 7.2% annual inflation (not hard to do) - it will equal 100% inflation over those 10 years, wiping out half the value in the bond-like investments. I do not think that you have enough equities to make up for inflation.

On Jun 25 05:23 PM Jonas Zamora wrote:

> One way I recommend is to divide your money into different pools.
> Pool #1 would meet your current expenses and pool #2 for longer term
> investing(equties/hedg...
>
> For example, if you have $1million, and need $50,000 a year income,
> put $50,000 in a money market for current year needs and $450,000
> in laddered CDs, laddered fixed income. Every year there will be
> $50,000 plus interest available for 10 years. That is pool #1.<br/>
>
> The 2nd pool would be $500,000 in actively managed equities(hedged
> when needed). You would allow this to grow over the next 10 years
> and use it to replenish your income portfolio.
>
> Outside of this money, you may consider other types of risk management
> to manage emergencies like health care, unemployment, or disability.
>
>
> Is this a perfect solution? Nothing is perfect, but it would give
> you better odds in not outliving your money and preserving capital
> in unforseen emergencies.

Jun 26 07:44 AM

[hksche2000:]

Your plan and explanations sound as good as any I've heard. Germany with its own big recession problems felt extremely tempted to tamper with SS until parliament ordered a "hands off" policy for all parties. Retirees vote and web savvy boomers will do so in even bigger numbers. Politicians job one (and most often only mission) is self preservation. So, yes, there will be tampering around the SS edges and some zero increase years (as in G), but SS will be here to stay and change a lot less than Medicare/caid. Other than politicians basic instincts for self preservation, there is another essential reason to have SS: where would you put all the shelters and soup kitchens if you cut SS?


On Jun 25 07:36 PM bcncv wrote:

> This brings up an interesting question. What should the average American
> assume Social Security will be worth in the future? This is a critical
> question for retirement planning. On one hand, it won't completely
> disappear. The politics of the issue are too strong. On the other
> hand, the laws of reality dictate that it can't exist in its current
> form forever.
>
> Personally, I assume that Social Security will grow at half the rate
> of inflation when planning my retirement in 35 years. I realize that
> this is completely unpredictable, but I am curious as to how other
> people are planning. What is everyone else out there planning for,
> SS wise?

Jun 26 01:57 PM

[speeddaimon:]

Personally, I just assume that Social Security will be defunct by the time I retire (30 years). So I don't plan for it, in fact, if I were a political sort of person, I would lobby for the government to kill it and just come out and say, ok everyone under 35, you don't have to pay into social security anymore, but you're not getting shit either.


On Jun 25 07:36 PM bcncv wrote:

> This brings up an interesting question. What should the average American
> assume Social Security will be worth in the future? This is a critical
> question for retirement planning. On one hand, it won't completely
> disappear. The politics of the issue are too strong. On the other
> hand, the laws of reality dictate that it can't exist in its current
> form forever.
>
> Personally, I assume that Social Security will grow at half the rate
> of inflation when planning my retirement in 35 years. I realize that
> this is completely unpredictable, but I am curious as to how other
> people are planning. What is everyone else out there planning for,
> SS wise?

Jun 26 04:38 PM