Retiring at 65 with $1.5 million: Making it last

@Money March 30, 2012: 6:29 AM ET

(MONEY Magazine) -- I'm in my mid 60s and I'm rolling $1.5 million into an IRA. I'd like to create a portfolio of 60% stocks and 40% bonds using low-fee ETFs and mutual funds. Is this a good plan -- and which funds and ETFs would you suggest? -- Ollie F.

Your plan is spot on.

The real beauty of it is your focus on keeping investment expenses down, a strategy that has the potential to boost returns by limiting the portion of the your investment's gain siphoned off by the fund company.

Most people understand that lower costs and higher returns can help them amass more savings during a career, but I'm not sure people appreciate the benefit of that combination in retirement -- it can substantially reduce the danger of running through your savings too soon.

Let's say you plan to withdraw an initial 4%, or $60,000, from your $1.5 million at age 65 and then increase that amount for inflation each year. And let's further assume that your annual expenses run 1.5% a year, a ballpark figure for people who invest in mutual funds and the like.

Reducing your investing costs by half a percentage point to 1% a year can lower your probability of running through your savings before age 95 by roughly 25%.

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Reduce your yearly investing expenses a full percentage point to 0.5% -- which is doable if you stick to ETFs and index funds with the lowest expense ratios -- and your chances of running through your dough within 30 years may decline almost by half.

There's no guarantee that you'll be able to duplicate these results exactly. That's because even though lower-cost investments do generally lead to higher returns, you can't be certain of getting a full percentage point in extra gain for each percentage-point reduction in expenses. So your results will depend, among other things, on the return your investments earn net of fees.

But to whatever extent lower expenses boosts your returns, your savings are likely to last longer at any given withdrawal rate. And that's a big deal in retirement, when the last thing you want to do is run out of money before you run out of time.

So where can you find ETFs and funds that will allow you to reap the benefits of low expenses?

Just go to our MONEY 70 list of recommended funds. There, you'll find plenty of funds and ETFs that have expenses that are well-below their category averages.

If you really want to play the skinflint, stick to the ETFs and index funds on the list that follow broad stock- and bond-market benchmarks, many of which have total annual expenses of 0.2% or less. And since research shows that people can become confused and overwhelmed when faced with a blizzard of choices, I also recommend that you keep your portfolio simple.

If you're up for a real no-muss-no-fuss approach, you can create a 60% stocks-40% bonds portfolio with just two investments: a total stock market ETF (VTI) or index fund (VTSMX), plus a total bond market ETF (BND) or index fund (VBMFX). That combo alone will give you a broadly diversified portfolio of U.S. stocks of all sizes, as well as high-quality corporate and government taxable U.S. bonds.

If you want to expand your stock holdings beyond the U.S., you can devote 10% to 20% of the equity portion of your portfolio to a total international stock ETF (VEU) or index fund (VGTSX), which would add shares of both foreign developed and emerging markets to your holdings.

Money 70: Funds to count on

You can diversify even more broadly if you wish, picking a real estate, TIPS or commodities fund or ETF. But before you start loading up on the ever-expanding smorgasbord of alternative investments pitched by investment firms today, be aware that more funds may not translate into better performance. In fact, a complicated and unwieldy portfolio may lead to subpar results.

As you get older, you may want to consider scaling back your stock holdings to prevent a market crash from decimating your nest egg late in life. Here's how different firms make the transition from mostly stocks to mostly bonds in their target-date retirement funds.

But whatever blend of stocks and bonds you start with and move to over time, you'll increase your chance of boosting your returns -- as well as the longevity of your nest egg -- by choosing ETFs and funds that siphon off as few of your investment dollars as possible along the way.

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