Many people are beginning to look at exchange traded funds (ETFs) as a retirement investment alternative to mutual funds. It is entirely possible, though not easy, to manage your own diversified basket of ETFs in your IRA or 401k. You have a variety of options here, including picking some all stock market ETFs or adding Health, Energy, Technology, and other sectors to get a diversified basket. You can browse the different ETFs that are out there at places like Instant ETF. Again, this is a more difficult approach to retirement planning, but not necessarily a bad one.

The preferred method of ETF investing is to take advantage of the long-term target ETFs offered: TDAX Independence 2010 ETF (TDD), TDAX Independence 2020 ETF (TDH), TDAX Independence 2030 ETF (TDN) and TDAX Independence 2040 ETF (TDV) and TDAX In-Target ETF (TDX). The ETFs automatically roll over your portfolio into risk positions that are inline with your current stage in life. Each offers an expense ratio of 0.65% compared with 1.3% expenses for comparable mutual funds. If you’re unsure if that is worth it see how much an extra 0.65% compounded annually can effect your portfolio – you may be surprised.

You do want to keep an eye on your ETFs and make sure that they remain solvent. ETFs are a relatively new addition to retirement planning and are somewhat untested over time. We have seen some funds be liquidated which often has tax repercussions for the long term investor. Just a few things to keep in mind before considering added exchange traded funds to your retirement planning.

Of course the big variable in this is your appetite for risk.  Many people can’t stomach their retirement fluctuating up and down over 40 years.  The simple answer to this: toughen up.  If your appetite for risk is limited invest into mutual funds and ETFs that are more conservative in nature or even go 20-30% below your recommended equity allocation, but do not throw all of your money into savings.  The harsh reality is that many savings accounts barely return the same money you put in year over year – that is to say inflation can run higher than the rate of return on your savings account.

Do your own research, but also do some simulations.  Use some basic assumptions to see the difference in how much you will have when investing in certain ways.  You may be surprised how much you’re losing (or gaining) by investing your retirement in a certain manner.

Traditional IRAs: great option for middle and lower classes individual who is not part of a pension plan where they are employed. The contributions are deducted from your taxable income. No taxes are charged on that it is time for it to be withdrawn. You can only withdraw over 59 years and 6 months old, or if you become disabled or another unique circumstance. You may not hold off on contributions beginning at 70 years and 6 months.

Roth IRAs: usually for middle and upper class individuals. This money is after tax, but you never have to pay taxes on the earnings and can begin withdrawing at age 50 and 6 months. The money never must be withdrawn and can be bequeathed upon your death.

Non-deductible IRAs: You can postpone taxes on the earnings until your withdrawal at time of retirement or disability.

KEOGHs: Self-employed people, particularly freelancers, can put a specific percentage (government mandated) into their account into the tax-deferred KEOGH account. There are many different types of KEOGHs and are very similar to the IRAs you would have working for an employer. See if you can get advice from a financial planner before choosing a KEOGH account.

401 (k)s: These retirement accounts are offered by most private companies. With them, you pay in a specific amount of your pre-tax income. Most employers will offer some form of matching plan that you should fully take advantage of. You usually can roll over your 401K to another employers plan should you leave your current position. Nothing is taxed from this type of account until you withdraw the money, which must be done after you are 59 years and 6 months old. In a 401k you will be asked to choose what type of investment you would like to be in. I often recommend someone who doesn’t have the interest in managing this investment to simply select a term fund based on their year you will retire – say 2045 – and then the fund automatically adjusts your account based on the different risk profile you have as you age.

403 (b)s: Very similar to 401ks, but are for people working for the public sector, including nonprofits. These plans are similar to 401ks.

Variable annuities: If you still have an amount of money to invest after maxing out the accounts above, you may want to look into investing in some variable annuities.