My husband, 58, and I, 53, have reached our highest-earning years. We have refinanced to a 2.75% mortgage with a very low monthly mortgage payment of $485. We have been maxing my husband’s 403(b) and now his 457 (he recently changed jobs), maxing both of our Roth IRAs and putting another $9,200 in brokerage accounts — basically investing 55% to 60% of our income.
Besides the $370,000 mutual funds in my husband’s employment plans and another $47,000 in my traditional IRA in target-date funds, we have focused on growing dividend income in the brokerage accounts and both Roths. As a result, we are under-invested in large-caps. Currently, we have a total of $842,000 in retirement accounts, a $40,000 emergency fund, mortgage debt of $63,000, and we pay our credit-card bills in full every month.
Large-cap ETFs seem expensive, so does it make any sense to invest in them right now?
See: I have about $3 million in pension and savings. Should I claim Social Security earlier than 70?
Dear Reader,
It’s so refreshing to hear how much of a focus you have on your retirement savings, and that you’re contributing, and even in some cases maxing out, your retirement accounts.
For those unaware, large-cap funds are focused on companies valued at more than $10 billion. ETFs, short for exchange-traded funds, are a growing and evolving type of fund similar to a mutual fund in that they are a “basket” of investments. So a large-cap ETF would comprise stocks of multiple large companies. Investors like these options because they provide stability in a portfolio, instead of excessive risk.
Take State Street’s SPDR S&P 500 ETF Trust
SPY,
which has total net assets of more than $454 billion. When you dive into the holdings of this fund, you will see companies like Apple
AAPL,
and Microsoft
MSFT,
Nvidia
NVDA,
and Tesla
TSLA,
and many other well-established behemoth companies. Large-caps tend to follow indices like the S&P 500
SPX,
which comprises 500 of the largest companies.
Read: What’s the best way to invest in the S&P 500?
Let me be clear — I do not provide investment advice. So any ETFs I mention are just meant to be used as examples to explain what they are, how they work, and when they make sense in your retirement plans.
You might think these large-cap ETFs are expensive when looking at the price of one share, but keep in mind ETFs are known for having more favorable fees attached. Unlike actively managed funds, they usually have low expensive ratios, which is the price you pay for administrative and management expenses.
Also see: Should I claim Social Security — or wait and live off my 401(k)? How do I make this decision?
For many retirement investors, large-cap ETFs make sense. “Most clients should have anywhere between 20% to 50% of their portfolio in large-cap ETFs,” said Dean Tsantes, a certified financial planner at VLP Financial Advisors. “This is an important part of the portfolio that generally creates growth.”
When looking for an ETF, review its average manager tenure, total net assets, overall rating, and the annualized performance for the last year, three years, five years and 10 years, Tsantes said.
Also, keep in mind, there are so many options under this umbrella. For example, large-cap ETFs can also cover non-U.S.-based companies, such as those in Europe or Japan, said Brad Aham, a certified financial planner at Equitable Advisors.
A qualified, trustworthy financial planner can help you make sense of how to construct a retirement portfolio, or how to mesh the goal of incorporating these investments with your other investments. If you want to do a bit more research, or get an idea of how they work in other retirement plans though, look at target-date funds, Aham said.
Target-date funds are investments that are tied to a specific year for retirement (say, 2040, or 2055). By looking at these funds’ holdings, you’ll see how managers use large-cap funds in their investment strategies. “That’s one way to get an idea of how professionals build a retirement portfolio,” Aham said.
Whatever you do, remember that it’s most important to have a diversified portfolio, so you can reap the benefits of all types of investments and protect yourself when one asset doesn’t do as well as you hoped.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
