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.