The way you invest for retirement obviously isn't the same way you want to invest during retirement. While you're working and accumulating wealth, you're willing and able to invest aggressively. Once the work-based income stops and you start living on your savings, however, you should shift to a more conservative approach. As a retiree, you'll also typically need your investments to begin generating at least some income. And if you can simplify the whole thing, so much the better.
With that as the backdrop, here's a closer look at three index-based exchange-traded funds (or ETFs) that all current and near-future retirees should consider buying. They collectively meet all the criteria older investors have in mind for their holdings at this stage of their lives.
Schwab U.S. Dividend Equity ETF
Let's start with the obvious reality. You're likely looking to your retirement savings to generate spendable cash once you're retired. That's no simple matter though. You want good income now, but you'll also want this dividend income to grow at a pace that at least keeps up with inflation in the future.
The solution is the Schwab U.S. Dividend Equity ETF (SCHD +0.28%), which is built to reflect the performance of the Dow Jones U.S. Dividend 100 Index.
Just as the name suggests, this index holds (about) 100 hand-picked dividend-paying U.S. stocks. Strong yields are a key characteristic of its constituents, of course, which include names like Amgen, PepsiCo, and Chevron. Other factors for inclusion in the index, however, are the consistency of a company's dividend payments and candidate companies' fundamental strength.
Curiously, dividend growth isn't specifically named as one of the index's stated goals. You still get it though. While its quarterly dividend payment isn't etched in stone, it is relatively steady from one quarter to the next. It also grows over time. The Schwab U.S. Dividend Equity ETF's most recent payment was $0.61 per share, which is almost twice as much as its typical payout from just five years back.
NYSEMKT: SCHD
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But what about capital appreciation? That's the even more curious detail. Although it's not one of the index's given goals either, you get that, too. This should come as no real surprise, of course. Numbers crunched by mutual fund company Hartford indicate stocks of quality companies with consistent, affordable dividends often end up outperforming the S&P 500 in the long run.
The distinguishing, driving factors here are stability and sustainability. Although investors love the idea of growth stories, the market actually supports and rewards stocks it can count on to continue delivering even in any and all environments. The Schwab U.S. Dividend Equity ETF is full of names of that sort.
This ETF's current dividend yield stands at 3.3%.
iShares High Yield Systematic Bond ETF
While the Schwab U.S. Dividend Equity ETF is a fine holding, know that owning it is something of a compromise. That is, although you're likely to achieve respectable long-term growth with it, you're not getting a ton of income in the meantime -- its dividend yield of 3.3% is respectable but not huge. It may not be strong enough to fully fund the kind of retirement you had in mind.
As an income-oriented addition to your retirement portfolio, also think about taking on a stake in the iShares High Yield Systematic Bond ETF (HYDB +0.28%). Just as the name suggests, this ETF is built to mirror a basket of high-yield bonds. In this case the index in question is the relatively obscure BlackRock High Yield Systematic Bond Index, which is simply a basket of high-yield bonds selected based on pre-defined criteria. It's comparable to the more familiar S&P U.S. High Yield Corporate Bond Index, or the ICE BofA 0-5 Year U.S. High Yield Constrained Index.
Regardless of its underlying index, this ETF's current yield is right around 7.5%. Nice.
NYSEMKT: HYDB
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How does Blackrock (the company managing the iShares family of ETFs) secure such a solid payout from fixed income instruments? Broadly speaking, the bonds this fund holds are higher-risk, therefore higher-yield. They're not quite "junk bonds" in terms of credit quality, but they're certainly not the best "investment grade" debt investors can own. Rather, these bonds are found somewhere in between these two extremes, balancing risk and reward.
There is a trade-off to understand here. That is, while you're getting a consistent flow of income from its underlying bonds' interest payments, you'll not be experiencing any capital appreciation; when bonds mature, their owners simply get their original principal back. You should also know that interest rate changes can impact bond values right up until they mature, for better and for worse. This fund's value will reflect such changes.
If you need above-average income right away though, a basket of high-yield bonds is a much smarter choice than trying to find two or three individual high-yield bonds. As the old adage goes, there's safety in numbers.
SPDR S&P 500 ETF Trust
Last but not least, add the SPDR S&P 500 ETF Trust (SPY +0.83%) to your list of exchange-traded funds that just might be a retiree's best friend. Surprised? It would be a little surprising if you weren't. This is a proxy for "the market," after all, and the market is a relatively risky bet for people without time or income to shield themselves from short-term volatility.
NYSEMKT: SPY
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Index-based instruments like the SPDR S&P 500 ETF Trust do, however, address a different kind of risk all retirees face. That's the prospect of outliving your retirement fund because you didn't continue growing it while you were living off of it. Although the aforementioned two funds might be able to keep up with inflation and your net withdrawals for a while, one or two unusual years could prove catastrophic to a portfolio that's solely income-minded.
Finding the proper balance between current income and future growth is no easy task, of course. You'll probably only want a modest stake in this ETF compared to your income-generating positions. You may not be able to afford any such exposure at all! You might need to trim your spending plans as part of achieving this delicate balance. It just depends on what you've got saved up and your immediate as well as future income needs.
Just plan accordingly, recognizing the last thing you want to be forced into doing is selling a piece of your stake in the SPDR S&P 500 ETF Trust at a low point.
