Case Summary

Before the 2008 market downturn, Bill and Karen were planning to retire within the next 3 to 5 years.  As the market correction continued into 2009, the couple decided that capital preservation was the number one priority and moved most of their investments into cash.

Now that markets have begun to recover and the economy appears to be regaining some footing, they face a decision.  Leave their retirement funds in cash and rebuild their savings by delaying retirement for several years.  Or possibly take a different approach to their portfolio and retire earlier?

Analysis

Bill and Karen will need to evaluate their appetite for risk balanced with their desire to retire sooner rather than later.  Importantly, they shouldn’t make the common investor mistake of planning for the future based on what happened in the past 12 months.

Financial Engines, a financial planning website, conducted an analysis that looks at the impact of the market decline in 2008 on investors nearing retirement.  The analysis found that even for investors within 5 years of retirement, modest increases in savings combined with slightly delayed retirement can recover their pre-2008 retirement outlooks if they stay in a diversified, age-appropriate portfolio.

Those who moved to an all cash portfolio, on the other hand, have more work to do to get back on track.  The analysis found that these investors are likely to have to delay retirement as much as 4 years above and beyond the steps needed to recover from the 2008 declines had they stayed in diversified, age-appropriate portfolios.

Portfolio Recommendations

Assuming that the couple chooses to take the path of higher savings and a diversified, age-appropriate portfolio, Bill and Karen will have plenty of ETFs to choose from in assembling their basket of investments.

For the fixed income component, the Vanguard Total Bond Market ETF (BND) provides diversified exposure to both government and corporate bonds at a very low cost.  Exposure to US equities is available through the Vanguard Total Stock Market ETF (VTI) which tracks an index that represents 99.5% or more of the total market capitalization of all of the U.S. common stocks.

Exposure to International equities can be gained through the MSCI EAFE Index Fund (EFA). The $35 billion fund invests in publicly traded securities in the European, Australasian and Far Eastern markets.

Bill and Karen may also consider allocating a small part of their portfolio towards real estategold or other commodity as a hedge against inflation.

For additional ETF investing choices, see the ETF Directory