Those Australians staring down the gilded barrel of retirement have more than a few decisions on their hands. Setting up one's affairs to fund what could hopefully be several decades of stress-free, work-free living is no simple task. One has to factor in one's desired lifestyle, how much capital is at one's disposal, what kind of superannuation arrangements are appropriate, and what kind of risk profile one is comfortable with. Another choice facing soon-to-be retirees is whether to invest in ASX shares or exchange-traded funds (ETFs).
Many Australians fund their retirement using stock market investments, whether they be inside or outside a superannuation fund.
Traditionally, most investors have opted for ASX shares. Blue chips like Telstra Group Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA), and Coles Group Ltd (ASX: COL) are always popular choices. That's thanks in large part to decades of delivering reliable and usually fully-franked payouts.
Saying that, ASX investors are also more spoiled for choice today than at any other time in our nation's history. This means retirees don't have to opt for blue-chip ASX shares. They also have a myriad of ASX ETFs to choose from. Many might even find investing in ETFs for retirement preferable to buying individual ASX stocks.
Image source: Getty Images
Choosing ETFs for retirement
Of course, not all ASX ETFs are suitable for retirees. In my opinion, those investors looking for a retirement investment should opt for funds that offer broad exposure to quality stocks at a reasonable cost. Index funds are a great place to start. Funds that cover the Australian market, such as the Vanguard Australian Shares Index ETF (ASX: VAS), or those that track the US markets, such as the iShares S&P 500 ETF (ASX: IVV), tick both of these boxes.
Investing in VAS, for example, means investing in everything from Westpac Banking Corp (ASX: WBC) and Woolworths Group Ltd (ASX: WOW) to JB Hi-Fi Ltd (ASX: JBH) and Ampol Ltd (ASX: ALD). As well as the blue chips we mentioned above.
Meanwhile, an internationally-focused fund like IVV offers up an indirect stake in the likes of Apple, Amazon, Exxon Mobil, Coca-Cola, Costco, and hundreds of other high-quality companies.
These index funds are broad, diversified, and passive investments that also pay out dividend distributions to their investors.
Retirees can also consider income-focused ETFs. Something like the State Street SPDR MSCI Australia Select High Dividend Yield ETF (ASX: SYI) only invests in ASX dividend shares, and offers a potential yield that is higher than a broad-based index fund.
Of course, not all ASX ETFs make for great retirement investments. I would personally not recommend any thematic ETFs that charge high fees for a retirement portfolio. For example, the BetaShares Crude Oil Index Complex ETF (ASX: OOO) is probably not the right fit, given its volatile nature and 1.29% per annum fee.
What about ASX shares?
Even though there are many ASX ETFs that I think would suit any Australian retiree, there's nothing wrong with sticking to the roads of tradition and going for blue-chip ASX shares to fund a retirement. The debate over ASX shares or ETFs comes down to individual preferences. Some might like the hands-off nature and passivity that ETFs offer. Others might enjoy the notion of directly owning shares in Australian companies and following their financial results to find the best investments.
One could also opt for both, dedicating a portion of a retirement portfolio to shares and another to ETFs. You could also throw in bonds or term deposits to increase diversity or reduce risk even further. Again, this all comes down to individual circumstances, so if you're tossing up these options, it might be a good idea to speak to a financial advisor about your own goals and risk tolerances. But what we do know for certain is that Australian retirees have never had more choice when it comes to funding their golden years.
