Exchange-traded funds, or ETFs, are a good way to build a retirement portfolio. They are low-cost, provide plenty of diversification because they track specific indexes and they provide certain tax benefits. Folks looking to retire early, or at least with a solid portfolio, can use ETFs as one of their building blocks.

You'll need to start saving early in order to have enough funds to accommodate your desired lifestyle after retirement, and the earlier the better. Since stocks drive a portfolio and bonds provide security, when you begin building your retirement portfolio it should consist primarily of stocks, and later on, as you are approaching retirement it should include bonds.

Where and When to Buy an ETF
ETFs can be purchased through Fidelity, Vanguard, T. Rowe Price, Charles Schwab and TD Ameritrade. Don't try to time the market. Determining the time to buy is really based on your current and future needs. Many so-called experts have tried to time the market and failed at it.

Put ETFs that have the highest growth potential into a Roth IRA as you won't need to pay income taxes on the earnings, principal, what's currently in the account or what you withdraw, since the money you are using to invest has already been taxed.

Buying ETFs intended to fund your retirement depends upon how much time you have available until you plan to retire. That will make all the difference in whether you buy an ETF that is primarily invested in stocks, bonds or a bit of both.

High Dividend ETFs
Some high-dividend ETFs include the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) and the SPDR Dividend (SDY). The PEY mimics an equity index called the Mergent Dividend Achievers 50 Index (the "Underlying Index"). This index consists of 50 stocks that are selected primarily on the basis of dividend yield and demonstrate consistent dividend growth. The SPDR replicates, before expenses, the price and yield of the S&P High Yield Dividend Aristocrats Index (the "Index"). This index is designed to measure the performance of the 50 highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed dividends policy of consistently increasing dividends every year for at least 25 consecutive years. Stocks included in the index have both capital growth and dividend income characteristics.

Fixed Income ETFs
If you need bond ETFs to add some fixed income to your portfolio, look into iShares Lehman Aggregate Bond Fund (AGG) and iShares Lehman 7-10 Year Treasury Bond Fund (IEF). The IEF mimics the Barclays Capital US 7-10 Year Treasury Bond Index (the "Underlying Index") which measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of between seven and ten years.

If you are looking to diversify with real estate, look into Real Estate Investment Trusts (REIT) such as the Vanguard REIT ETF (VNQ). For example, the VNQ fund tracks the performance of the MSCI US REIT Index which is comprised of stocks of publicly traded equity REITs.

The Bottom Line
There are many ETFs you could invest in; the key is to determine your timeline until you'll need to access your funds. This timeline is what determines which type of ETF you should buy. For example, according to "Exchange-Traded Funds for Dummies," if you have less than 15 years to retire, you might want to take 2% from your stock investments and instead allocate these funds to bonds. When looking to build a retirement portfolio, research growth investments which not only include stocks but also real estate and commodities. Also look into security investments. These include fixed annuities, government bonds, corporate bonds and market-neutral mutual funds. Whatever you decide on, make sure you start as early as possible. Save as much as you can and invest wisely by doing thorough research, not by following emotion or public opinion.

Related Articles
  1. Retirement

    Is the New myRA Plan Right for You?

    The new myRA accounts seem to deliver on their promise of being “simple, safe and affordable.” Just be prepared for paltry annual returns.
  2. Retirement

    5 Reasons to Start a Business After You Retire

    It can be beneficial in any number of ways: mentally, occupationally and even financially.
  3. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  4. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  5. Investing Basics

    Fee-Only Financial Advisors: What You Need To Know

    Are you considering hiring a fee-only financial advisor or one who is compensated via commissions? Read this first.
  6. Retirement

    How Much Money Do You Need to Retire at 56?

    Who wouldn't want to retire early and enjoy the good life? The question is, "How much will it cost?" Here's a quick and dirty way to get an answer.
  7. Retirement

    The Best Strategies to Maximize Your Roth IRA

    If a Roth IRA makes sense for you, here are ways to build the biggest nest egg possible with it.
  8. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  9. Retirement

    Suddenly Pushed into Retirement, How to Handle the Transition

    Adjusting to retirement can be challenging, but when it happens unexpectedly it can be downright difficult. Thankfully there are ways to successfully transition.
  10. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  1. Can I buy ETFs for my Roth IRA?

    A Roth IRA held at a brokerage firm is able to facilitate the purchase of exchange-traded funds, or ETFs. Using ETFs within ... Read Full Answer >>
  2. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  3. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  4. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  5. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  6. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center