Once you retire, your investment priorities shift. You are no longer as focused on growing your nest egg as you are on preserving your wealth and generating income. Many of the investments that work best in a portfolio prior to retirement don't necessarily meet your needs after you leave the workaday world. With that in mind, here are three exchange-traded funds, or ETFs, that work well for retirees and their investment objectives.
It's important to remember that once you enter retirement, you don't simply stop investing. We don't simply cash everything in as soon as we clock out for the last time. Instead, as we approach retirement, we should gradually shift our asset allocation so that we have a little less in stocks and more in bonds or other "safe" investments. Once we're in retirement, we can tap all our income streams, such as Social Security and annuities.
But no matter our age, it's generally best to keep at least some of our assets in stocks, because the stock market is one of the most effective long-term wealth-builders around. Americans are living longer than ever before, and if you funnel all your capital into conservative investments at the age of 65, you may regret it at age 85. Your nest egg may not even keep up with inflation, which averages 3% per year.
Thus it's smart to keep much of the money we don't expect to need for at least five years in the stock market. For that, I recommend the Vanguard Total World Stock ETF (NYSEMKT:VT), which tracks the world's stock markets via its holdings in nearly 7,000 stocks. Its dividend recently yielded 2.3%, and its expense ratio (annual fee) of 0.18% is very low. Its top holdings include familiar domestic and international names, such as Apple (NASDAQ:AAPL), ExxonMobil Corporation (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Wells Fargo & Co (NYSE:WFC), Nestle (NASDAQOTH:NSRGF), and Toyota Motor Corp. (NYSE:TM). As the world's economies grow, so will the portion of retiree nest eggs invested in this ETF.
Retirees should definitely consider keeping some stock exposure in their investment portfolios long after they stop working. But that doesn't mean being overly aggressive with your portfolio. Among exchange-traded funds, the Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) has many attractive attributes that will appeal to conservative retired investors.
This ETF holds dividend stocks, but it's not focused simply on the stocks that have the highest yields. That strategy can actually add to risk, as the highest-yielding dividend stocks often face dangerous prospects that can lead to payout cuts and falling share prices. Instead, Vanguard Dividend Appreciation focuses on those dividend stocks that have the best track records of consistently increasing their payouts over time. Companies that can regularly boost their dividends tend to have more financial discipline to make it through tough times while still treating shareholders well, and those are exactly the traits conservative investors want to see in their stock exposure.
You certainly don't have to hold all of your money in a dividend-stock ETF in retirement, and having some money in even more conservative investments such as bonds and other fixed-income securities is prudent. But for growth, Vanguard Dividend Appreciation has a good combination of potential returns and manageable risk that should appeal to retirees.
According to the Social Security Administration, the average male aged 65 is expected to live another 19.3 years. This means that if their retirement savings are to outpace inflation until the end of their days, many retirees will need to maintain diversified equity investments such as those pointed out by Dan and Selena. But a retiree's portfolio should also by diversified by asset class, which means that bonds, such as those in the iShares Treasury Inflation Bond ETF (NYSEMKT:TIP), can play an important role.
Since the Great Recession, income-seeking investors have turned away from U.S. Treasury bonds in favor of dividend-paying stocks. But with the U.S. economic recovery maturing and inflation rates potentially climbing, investors might find bond yields more enticing over the next few years. If so, then the iShares ETF could be a smart choice.
The ETF invests in various maturities of U.S. government bonds whose face value rises alongside inflation. Despite tame inflation over the past five years, the TIP's average annual total return has been 3.97%. Over the past 10 years, the average annual return has been 4.23%. Of course, past performance is no guarantee of future returns, especially given that rising interest rates could weigh down bond prices and offset some of the benefits of inflation protection. Investors worried about interest rate risk might want to consider the Vanguard Short-Term TIP ETF (NYSEMKT: VTIP), as shorter-term maturities tend to be less negatively influenced by interest rate hikes.
Dan Caplinger owns shares of Apple. Selena Maranjian owns shares of Apple and Johnson & Johnson. Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends Apple, Johnson & Johnson, and Wells Fargo. The Motley Fool owns shares of Apple, Johnson & Johnson, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.