When investing in retirement, you may not have the same energy and interest to study stocks and other investments, carefully deciding which to buy and when -- and then when to sell. Your skills could decline over time, too. So consider investing in exchange-traded funds (ETFs) with some or much of your retirement money.
Really, just one ETF, such as the first one below, could be all you need for retirement -- but here are a handful to consider.
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1. An S&P 500 Index fund
The Vanguard S&P 500 ETF (VOO -1.05%), with its extremely low annual fee (also referred to as its expense ratio) of 0.03%, is a great place to start, and it could be all you need. First, though, understand that an ETF is essentially a fund that trades like a stock. So you can easily buy as little as a single share through your brokerage, and you can sell it any time -- though hanging on for decades is a fine way to aim for long-term financial security.
Buying shares of it will spread your dollars across most of the 500 or so stocks in the S&P 500 index, which is focused on the biggest American companies. The index only holds 500 of America's thousands of stocks, but together they make up around 80% of the overall stock market's value. Many people look to the S&P 500 as a benchmark for the U.S. stock market, or, more accurately, for America's large-cap stocks.
With this and other funds you consider, do a little research into them to see what, exactly they own and what they charge in fees, etc. (In general, index funds -- funds that track various indexes -- sport very low fees.)
One thing you'll notice about a standard S&P 500 index fund, such as this one, is that while it holds hundreds of companies, some of them are so big that they dominate it. The index's top 10 holdings, for example, which include Apple, Microsoft, and Amazon, make up around 29% of its entire value. That's because the index is market-cap weighted, meaning the companies with the largest market value have an outsize influence on the index's value. You can imagine that the last 100 or even 200 holdings make up a small chunk of the index's value.
You might remedy this by investing instead in an equal-weighted S&P 500 fund, such as the Invesco S&P 500 Equal Weight ETF -- though its long-term performance has lagged the Vanguard S&P 500 ETF.
2. A total U.S. stock market fund
An S&P 500 index fund is terrific, but it doesn't exclude the many smaller companies in America, such as Kohl's, Mattel, The New York Times, Harley-Davidson, and homebuilder Toll Brothers. If you'd like your financial fortunes tied to just about all companies on the major American stock exchanges, consider investing in a total U.S. stock market ETF, such as the Vanguard Total Stock Market ETF (VTI -1.07%).
This ETF has an ultra-low annual fee of 0.03% -- which is not surprising, as it's a Vanguard fund, and Vanguard is known for low fees.
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3. A total world stock market fund
You can go even wider, and have your money distributed across the stock markets of the world -- with a total world stock market ETF such as the Vanguard Total World Stock ETF (VT -0.86%). Its top holdings look a lot like the top holdings of the first two ETFs above, but among them you'll also find companies such as Taiwan Semiconductor, China's Tencent Holdings, and Toyota Motor.
As another Vanguard fund, it has a very low annual fee, of just 0.07%.
4. A dividend-focused fund
As a retiree, you might particularly appreciate an index fund that pays a dividend. The ones above do, but you'll get a bigger payout from an ETF that's specifically focused on dividends -- such as the Vanguard Dividend Appreciation ETF (VIG -0.63%). Whereas the Vanguard S&P 500 ETF recently sported a dividend yield of 1.34%, the Vanguard Dividend Appreciation Fund yielded 1.74%. (Its annual fee was just 0.06%, too.)
Dividend-paying companies are terrific wealth builders for younger investors and terrific income generators for older ones. A plus for dividends is that they tend to be paid faithfully no matter how the stock market is doing, and healthy, growing dividend payers will increase their payouts regularly.
This ETF aims to replicate the performance of the S&P Dividend Growers Index -- less its tiny fees, of course. That index focuses on companies that have been paying dividends consistently -- generally for at least 10 consecutive years. Interestingly, it excludes the top 25% of the companies with the highest dividend yields, as an ultra high yield is often tied to a company in distress. It also excludes real estate investment trusts (REITs).
Some of its top holdings include Microsoft, UnitedHealth Group, Johnson & Johnson, Visa, Coca-Cola, and Costco.
5. A real estate fund
Speaking of real estate, that's not a bad category of stocks to invest in, and it can be done easily via REITs. REITs are required to pay out at least 90% of their earnings in dividend form, so that's a plus for retirees. One of many REIT-focused funds to consider is the Vanguard Real Estate Index Fund ETF (VNQ -0.83%), with its annual fee of 0.12%.
Some of its top holdings are American Tower, Public Storage, Realty Income, and Digital Realty Trust. Since such companies' yields tend to fluctuate with their fortunes (whereas standard common stock dividends tend to be held steady until increased -- or, in hard times, decreased or eliminated), Vanguard points out that it can't offer a definite payout amount. But on the ETF's web page, Vanguard notes recent effective yields of 1.8% and 2.6%, depending on whether the number has been adjusted (for capital gains distributions and returns of capital).
These are just a few funds that retirees and near-retirees might consider for their portfolios. Don't think that once you retire you shouldn't invest in stocks -- because many of us will have retirements that are several decades long. The portion of your nest egg that you won't need for around 10 years might be partly or mostly in stocks.
On the other hand, even those far from retirement could do well with any of these funds.
