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Build a Retirement Plan With Just 7 ETFs

Here's how to replicate some of the world's biggest retirement plans

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Fixed Income

The Thrift Savings Plan has two options for fixed income. There’s the G Fund, whose objective is to generate interest income without risking the principal. Then there’s the F fund, which seeks to replicate the performance of the Barclays Capital U.S. Aggregate Bond Index, representing the broad U.S. bond market and consisting of high-quality fixed-income securities with maturities of more than one year.

Short-Term Bond Exposure — SPDR Barclays 1-3 Month T-Bill ETF (BIL): The G Fund invests in short-term U.S. Treasury securities that are issues specially made for the TSP, so there is no specific benchmark. However, a suitable proxy would be the Barclays Capital US 1-3 Month Treasury Bill Index, which includes all publicly issued zero-coupon US Treasury Bills that have a maturity of less than three months and more than one month, are investment-grade and have $250 million or more outstanding. The SPDR Barclays 1-3 Month T-Bill ETF is a collection of eight T-Bills that don’t pay a whole lot but generally preserve capital fairly well. The big thing to worry about is inflation suddenly whipping up. However, with a time frame of less than three months, the risk is minimal.

Medium-Term Bond Exposure — iShares Core Total U.S. Bond Market ETF (AGG): With four obvious choices from Vanguard, State Street (STT), iShares and Schwab (SCHW), I’ll go with the iShares Core Total U.S. Bond Market ETF (AGG), which has 1,961 holdings providing a 12-month yield of 2.39%. AGG has total net assets of $14.4 billion, and since inception in 2003 it has achieved an annualized total return of 4.5% and never fallen in the red. That’s the beauty of bonds.

Alternative Assets

TSP doesn’t make alternative investment choices for its plan holders, but I still think “alts” are good for retirement planners to hold. My suggestions?

Alternative Asset Exposure — PowerShares Global Listed Private Equity Portfolio (PSP): PSP is a group of 65 holdings invested in private equity and business development companies. The total expense ratio is 2.19%, which includes 1.49% in acquired fund fees that are paid by some of the private equity and BDCs for investment in other funds. Net that out, and the true expense ratio is 0.70%.

Alternative Asset Exposure #2 — iShares Cohen & Steers REIT ETF (ICF): ICF invests in 30 of the largest real estate investment trusts in the U.S. including Simon Property Group (SPG), the largest mall owner in the entire world. Although there’s some real estate in the three equity ETFs, I think this fund makes a good counterbalance to the equity funds. With a 30-day SEC yield of 3.26% and an annualized total return of 10% over the past 12 years, it can add a little spice to an otherwise bland portfolio.

Retirement Allocation

As discussed earlier, the portfolio’s asset allocation is 40% equity, 40% fixed-income and 20% alternative assets and cash. For illustrative purposes, I’m going to eliminate cash.

Here, then, is my model $100,000 portfolio:

  • Equity (40%): $10,000 VOO, $10,000 DBEF, $20,000 VXF
  • Fixed Income (40%): $30,000 AGG, $10,000 BIL
  • Alternative (20%): $15,000 ICF, $5,000 PSP

I hope this serves you well. And I will keep track of this retirement “plan’s” performance in the months ahead.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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