How To Use ETFs to Support Clients’ Long-Term Retirement Goals

Exchange-traded funds (ETFs) have evolved from niche investment vehicles into mainstream retirement planning tools. While their accessibility makes them appealing for long-term goals, successful retirement planning with ETFs requires more than simply choosing popular funds.

Their strategic application in retirement planning requires a deeper understanding of risk, time horizon, income needs, and portfolio construction. This article will explore how different types of ETFs can support retirement goals—whether that means growth during accumulation, stability in pre-retirement, or income generation in retirement. It will also highlight how to use ETFs to complement other vehicles like mutual funds, annuities, and individual securities.

Matching ETF Types to Retirement Phases

Clients’ needs evolve significantly during their retirement journey. During the accumulation phase, the focus centers on growth and wealth building. As clients approach pre-retirement, priorities shift toward reducing portfolio volatility while maintaining the potential for growth. Finally, in retirement, the focus shifts to generating reliable income and preserving capital. Each phase presents specific opportunities where different ETF strategies can provide targeted answers.

Accumulation Phase: Growth and Diversification

The accumulation phase of retirement planning is the time to help your clients harness the power of compounding and long-term growth. Here are ETFs that fit the bill:

• Equity ETFs: These ETFs, like those that track the S&P 500 or other total market ETFs, are low-cost, broad-based index funds offering scalable growth. International equity ETFs can be a solid choice for investors with an appropriate risk tolerance, providing global diversification.  
• Sector ETFs: These aren’t for everyone, but they’re a great option for clients interested in growth sectors such as technology, healthcare, and green energy. 

Pre-Retirement Phase: Risk Mitigation and Retirement Positioning

As clients approach five to 15 years from retirement, depending on their risk tolerance, you should guide them to start reallocating toward funds that focus more on capital appreciation and reduce drawdown risk:

• Low-volatility ETFs: Although low-volatility ETFs may underperform equity heavy-hitters in bull markets, they can provide a good mix of growth and protection against drawdown risk and market swings.
• Balanced or asset-allocation ETFs: Clients in the pre-retirement phase may benefit from these ETFs, which hold a mix of stocks and bonds, offering both growth and income in one fund. These ETFs rebalance in a fixed or gradually shifting ratio. 

Retirement Phase: Income and Stability

Investors nearing retirement might wish to exit ETFs altogether, but there are ways to incorporate ETFs into portfolios to deliver income, manage longevity, and preserve capital:

• Dividend ETFs: Dividend ETFs range from those concentrated on blue chip stocks to those targeting companies with low volatility and reliable dividends. They offer retirees a dependable income for retirement drawdowns, but dividends are not guaranteed, unlike bond coupon payments.
• Bond ETFs and ladders: Bond laddering is a common strategy for retirees to create a pension-like income stream. For clients in or nearing retirement, laddering ETFs can offer convenience, diversification, and income, eliminating the need for retirees to manage individual bond holdings.

Building a Retirement-Focused ETF Portfolio

Creating a long-term retirement ETF portfolio requires a strategy that balances growth, income, tax efficiency, and personal values, all while considering a client’s risk tolerance, timeline, and goals.

Diversification is a cornerstone of investing and the foundation of any solid portfolio that involves ETFs. You can help clients diversify across both asset classes and geographies by blending domestic and international equity ETFs with investment-grade and high-yield bond ETFs according to their unique needs.

Effectively managing taxes is an equally important part of long-term retirement planning. Some ETFs are more tax-efficient than others because of their low turnover and limited taxable events, such as dividends and capital gains. When considering an investor’s complete portfolio, it’s wise to keep tax-efficient investments in taxable brokerage accounts.

Finally, ensure that the ETFs align with your client’s personal values, where appropriate. Not all clients will focus on environmental, social, and governance (ESG) investing or values-based ETFs. Still, for those who do, portfolios should account for these preferences without sacrificing performance. 

Managing Risks and Income with ETFs

The most significant question mark in most people’s minds as they think about retirement is how to make their money last. Because of their structure, ETFs can help address the financial risks retirees face, including market downturns during early retirement, rising inflation, and concerns about outliving their savings. 

Sequence of Returns Risk

Poor investment returns, particularly when retirees start withdrawing money from their portfolio, can derail even the best investment portfolio. To mitigate this risk, clients should rebalance their portfolios annually using low-volatility and bond ETFs to limit sharp drawdowns. 

Longevity Risk

ETF strategies can help mitigate the risk of retirees outliving their retirement savings. Income-generating ETFs (like dividend or bond ETFs) can provide a sustainable and predictable income stream throughout retirement. To extend a retiree’s portfolio life, use these ETFs in tandem with annuities or pensions. 

Another option for lowering longevity risk is to include options-based income ETFs in your client’s portfolios. Covered call strategies used in options-based income ETFs generate additional monthly income. Additionally, these ETFs provide a reliable alternative to cash flow without relying on dividend yields or interest rates. Returns are capped, though, so they’re best used as part of a diversified strategy.

Inflation Risk

When strictly considering ETFs to reduce inflation risk, use ETFs that include TIPS, real estate investment trusts, or have commodity exposure. These assets alone can help preserve purchasing power over time. However, as part of a larger investment strategy, you can mix ETFs with other assets that have different inflation responses to provide portfolio durability while maintaining a focus on the client’s long-term goals. 

The Bottom Line

ETFs’ flexibility, affordability, and diversification make them a go-to tool in any retirement planning toolkit. Like any good tool, ETFs are most effective when used for the right job.

While they can be a cornerstone of supporting a client’s long-term retirement goals, they are most effective when combined with other strategies and assets, such as pensions, annuities, investments, or guaranteed income sources. By understanding ETF mechanics and aligning choices to each client’s timeline, risk tolerance, and goals, you can help manage risks, deliver cost-effective diversification, and meet their evolving needs as they prepare for and then enter retirement.