ETF Portfolios and Savings Strategies for Retirement

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by: Dirk Quayle, CFA

Investors face two key decisions when trying to plan for retirement. How to invest their money and how much to save. Both are critical variables when an investor considers possible retirement wealth and income scenarios. In this article I provide ETF strategy portfolios targeted for retirement based on an investor’s current age, and overlay a savings plan on the ETF portfolio strategies. The result provides examples of wealth at retirement and income during retirement that the portfolios might generate.

ETF Strategy Portfolios for Retirement

Before we can look at possible retirement wealth, first it is necessary to determine an investment strategy today and estimate how it might change in the future. In a previous article I introduced the MarketGlide asset allocation methodology – the average asset allocation of the top 34 asset managers as determined by their target date mutual funds. MarketGlide ETF portfolios have recently been re-balanced (done quarterly) to reflect the changes made by the top managers. For this example I provide the ETF allocations assuming the investor is 35 years old today and targeting age 65 retirement. This is the MarketGlide 2040 target strategy portfolio and it is designed to change allocations over time automatically as determined by the market (I have provided performance information at the end of the article and more information on MarketGlide methodology and other MarketGlide portfolios visit marketglide.com).

ETF Allocation Today and as Projected in Year 2040 for 35 year old

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Savings Strategies Using the ETF Target Strategy Portfolios

The table below (click to enlarge) highlights possible wealth and retirement income generated by three saving scenarios. One highlights what $100/month in savings might generate in wealth and in retirement income. The other two scenarios target the savings required for an investor interested in generated $50,000 and $100,000 per year in retirement income starting at age 65. All three scenarios assume the ETF portfolios adjust over the life of the forecast as noted above. Below are some key concepts to understand about this and any other savings strategy that an investor is considering.

Wealth and Income Generated by MarketGlide 2040 ETF Porttfolio and Savings Strategy

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To customize your own savings strategy with different MarketGlide ETF portfolios and savings amounts visit free marketglide planner.

1. Outcomes are Reasonable Approximations

The wealth and income shown in the tables provides a reasonable ballpark to target and track to over time. While no retirement planner can predict the future, some will provide more realistic outcome ranges depending upon the methodology underlying the forecasts.

2. Forecasting Methodology

MarketGlide uses expected returns and covariances for each asset class underlying each ETF, and simulates hundred of future economic scenarios that vary economic performance and resulting performance of the investments. The majority of retirement planning tools do not use detailed asset class forecasts. In addition, a key difference in MarketGlide’s wealth forecasting methodology is the changing investment strategy that is automated over the forecast period. A 35 year old investor is projected to age 65 with an investment strategy that changes and grows more conservative every year.

3. Outcome Confidence

The tables below reflect a confidence level of 85%. Of all the hundreds of forecasts generated, 85% were better than or equal to the wealth and income shown in the tables. This is considered to be a relatively high level of confidence, and therefore conservative.

4. Before tax/after tax

MarketGlide is projecting wealth and income on a before tax basis. Wealth is growing without being taxed and income in retirement is before tax. So assume this is money in an IRA or 401(k), although not many 401(k)s yet allow access to ETFs.

5. Current vs Future dollars

The wealth and income forecasts adjust dollars for inflation and present results in terms of today’s dollars.

6. Converting Wealth to Income

At age 65 the wealth is estimate. In order to get a ballpark idea of the income this might provide during retirement we use current market rates for annuitization to convert wealth into an annuity income stream and approximate a perpetual income stream.

Performance of MarketGlide 2040 ETF Portfolio

Here is an update on the performance of the MarketGlide 2040 ETF portfolio relative to the top 34 asset managers and their 2040 target date mutual funds:

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Please note that MarketGlide portfolios are not suitable for all investors and each investor should consider his or her own financial situation or consult a financial advisor before making their own allocation decisions. Any securities discussed are used as a reference and should not be considered advice. There are risks in any investment strategies, including passive ETF investments and prior performance does not guarantee future success.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.