How to Use ETFs to Save for Retirement

Exchange-traded funds, or ETFs, are gaining popularity among those saving for retirement. These securities are attractive to many people because they are index funds rather than individual stocks, but they cost less than traditional indexes. If you want to use ETFs to save for retirement, you can investigate some general information about how they are traded and the costs associated with them.

Things You'll Need

• Financial adviser

Instructions

1. Talk to your employer's human resources or retirement office to find out if ETF financial advice is offered to you. Some employers are starting to allow their workers to buy into ETFs along with 401(k) plans to help save for retirement. Your employer may pay for you to meet with a financial adviser to help plan your investment strategies.

2. Look for ETFs that follow major indexes like the Dow Jones or the S&P 500. You can use these ETFs to save for retirement because they generally post long-term gains. As you plan for retirement, you'll want to find safe places to park your money that require minimal management and grow over 5- and 10-year periods.

3. Diversify your ETF holdings. Just like with regular stock portfolios, you don't want to put all of your money in one security. Ideally, you want your holdings to be inversely proportional, so that when one of your ETFs decreases in value, it causes another ETF to increase in value, which still leads to the general growth of your portfolio.

4. Make contributions to your ETFs monthly or bimonthly. Even if you use ETFs to save for retirement, you still need to pay broker's commissions every time you buy or sell a stock. The commission is the same regardless of how many shares you buy, so it's better to contribute money in bulk.

5. Stay up-to-date on new ETF retirement simulation software. Companies like Invest n Retire, Advisors Capital Resource and Fulcrum Financial Inquiry are developing programs that will simulate a variety of ETF market conditions and help people use these securities to save for retirement. You'll want to look for programs that tell you things like how much to invest monthly to meet your retirement income goal.

Tips & Warnings

• If you use an ETF to save for retirement, you'll want to invest in secure industries that have the potential for growth, like electronics or oil futures.

• Meet regularly with a financial adviser to make sure your ETFs are performing well.

• Avoid day trading with your retirement money because this type of investing is very risky.