Why a 3 ETF Portfolio May Be All Most Retirees Need
The financial industry profits from complexity, which is one reason most retirees end up managing far more funds than they actually need. A simpler structure exists, and the math behind it tends to favor the retiree.
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Most retirees end up managing way more funds than they need to, and not because it produces better results, but because nobody ever sat them down and explained that it wasn’t necessary. The financial industry is already complex, but a three-fund spreadsheet won’t generate advisory fees while dozens of funds do.
Pick a total US stock market fund, an international stock fund, and a total bond market fund, and you have exposure to thousands of securities across every major asset class on the planet. That’s your whole portfolio.
What the Three Funds Actually Cover
The US total stock market fund is the foundation, so something like the Vanguard Morningstar Total Stock Market ETF (NYSE:VTI) gives you the entire domestic market in a single ticker. This includes an array of large caps, mid caps, small caps, growth stocks, value stocks, all of it. When the US economy grows, this fund grows along with it and when it stumbles, the fund stumbles too, which is why it can’t be the only part of a portfolio.
The international fund handles everything outside US borders, including markets in Europe, Asia, and emerging economies don’t always move in the same direction as domestic markets, and that’s the whole point. Owning both means a rough year in the US doesn’t necessarily mean a rough year for the entire portfolio.
Bonds won’t make anyone rich, but they also won’t keep a retiree up at night during a bad market year, which at a certain point is worth a lot more than the upside. For a retiree who is actively drawing down their savings, this kind of stability matters far more than most people realize until they actually realize it. A bad year in equities hurts a lot less when part of the portfolio hasn’t really moved.
The Simplicity Is the Point
One of the things that gets lost in conversations about having a three-fund portfolio is that low maintenance isn’t a side benefit, but is a core feature instead. A retiree managing a 20-fund portfolio has to track 20 different positions, understand how they interact, decide when to rebalance, and figure out which ones to sell first for tax purposes. A retiree with three funds does almost none of this.
Expense ratios also matter more in retirement than most people account for. The average actively managed fund charges somewhere between 0.5% and 1% annually. This sounds small, until you realize it will compound in reverse, quietly reducing the balance every single year regardless of performance.
Broad market ETFs from names like Vanguard, Fidelity, or Schwab often charge 0.03% or less. On a $750,000 portfolio, that difference adds up to thousands of dollars annually that stay invested instead of going to a fund manager.
Where the Allocation Actually Lives
The three funds can be pretty straightforward, but it’s the allocation between them that really creates a decision you don’t want to make lightly, not to mention it’s going to change depending on where someone is in retirement.
The 100 minus age rule puts a 65-year-old at 35% bonds and 65% stocks, which is a good place to start. It gets conservative pretty quickly though, and for someone who is healthy and realistically looking at 25 or 30 more years, a portfolio that skews too heavily toward preservation too early can become its own problem as the money still needs to grow.
A slightly more aggressive split, 70% stocks and 30% bonds, gives the portfolio more room to grow in the early retirement years when spending tends to be the highest. As the years go on, making gradual shifts toward bonds reduces the exposure to market swings at a time when there is less of a runway to recover from down markets.
What It Doesn’t Solve
What a three-ETF portfolio won’t tell you is how much you need to withdraw every year to live on. It won’t tell you when to claim Social Security, how to handle RMDs, or which account to tap first when tax season rolls around. These are the real decisions that have to be made outside of the portfolio, and they absolutely matter.
What the three-fund approach does is remove the investment complexity from the equation so those other decisions, like Social Security timing, get the attention they deserve. Most retirees who struggle financially during retirement are not doing so because they picked the wrong funds.
Instead, they are struggling because withdrawal rates got out of hand, or a market downturn hit at a bad time, or Social Security was claimed too early. Simplifying the portfolio down to three ETFs doesn’t create those problems, and while it won’t solve them either, it does get the investment side out of the way in a simplified manner.
For most retirees, this is exactly what is needed. A portfolio that doesn’t require constant decisions is a portfolio that is harder to mess up, and in retirement, not messing up is the whole ballgame.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
