My husband of 58 years, my 53 year old, and I have reached our highest income years. We refinanced to a 2.75% mortgage with a very low monthly mortgage payment of $485. We maxed out my husband's 403(b) and now 457 (he recently changed jobs), maxed out both of our Roth IRAs and put another $9,200 into brokerage accounts – where we essentially invest 55% to 60% of our income.
Besides the $370,000 in mutual funds in my husband's employment plans and another $47,000 in my traditional IRA in target date funds, we focused on increasing dividend income in our brokerage accounts and both Roths. As a result, we suffer from a lack of investment in large companies. Currently, we have a total of $842,000 in retirement accounts, a $40,000 emergency fund, $63,000 in mortgage debt, and we pay our credit card bills in full every month.
Large-cap ETFs look expensive, so does it make sense to invest in them now?
be seen: I have about $3 million in pensions and savings. Should I claim Social Security before age 70?
Dear reader,
It's so refreshing to hear how much you're focusing on your retirement savings, and that you're contributing to, and in some cases even exceeding, your retirement accounts.
For those who don't know, large-cap funds focus on companies worth 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 represent a “basket” of investments. So large-cap ETFs will include stocks of many large companies. Investors like these options because they provide stability in a portfolio, rather than excessive risk.
Take State Street's SPDR S&P 500 ETF Trust SPY, for example,
Its total net assets amount to more than $454 billion. When you dig deeper into this fund's holdings, you'll see companies like Apple AAPL,
and Microsoft MSFT,
nvidia out of stock,
And Tesla TSLA,
And many other well-established giant companies. Large-cap stocks tend to follow indices like the S&P 500 SPX,
Which includes 500 of the largest companies.
is reading: What is the best way to invest in the S&P 500 index?
Let me be clear – I am not providing investment advice. So any ETFs I mention are only meant to be used as examples to explain what they are, how they work, and when they make sense in your retirement plans.
You may think that these large-cap ETFs are expensive when looking at the price of a single stock, but keep in mind that ETFs are known for their more favorable fees. Unlike actively managed funds, they typically have low cost ratios, which is the price you pay for management and administrative expenses.
See also: Should I claim Social Security — or wait and live beyond my 401(k)? How do I make this decision?
For many retirement investors, large-cap ETFs make sense. “Most clients should have between 20% to 50% of their portfolio in large-cap ETFs,” said Dean Tsantis, a certified financial planner at VLP Financial Advisors. “This is an important part of the portfolio that creates overall growth.”
When looking for an ETF, review its manager's average tenure, total net assets, overall valuation, and last year's, three-year, five-year, and 10-year annual performance, Tsantis said.
Also remember that there are many options under this umbrella. For example, large-cap ETFs can also cover companies that aren't based in the U.S., such as those in Europe or Japan, said Brad Aham, a certified financial planner at Equitable Advisors.
A qualified and trustworthy financial planner can help you understand how to build a retirement portfolio, or how to connect the goal of combining these investments with your other investments. If you want to do more research, or get an idea of how they work in other retirement plans, look at target-date funds, Aham said.
Target-date funds are investments tied to a specific retirement year (for example, 2040 or 2055). By looking at the holdings of these funds, you will see how managers use large-cap funds in their investment strategies. “This is one way to get an idea of how professionals build a retirement portfolio,” Aham said.
Whatever you do, remember that it is important to have a diversified portfolio, so you can reap the benefits of all types of investments and protect yourself when an asset does not perform as you had hoped.
Do you have a question about your retirement savings? Email us at HelpMeRetire@marketwatch.com
