How to use income ETFs for retirement income

Using income ETFs for a life income fund (LIF)

As you approach retirement, Garrett, it’s good to revisit your investment strategy. It may not necessarily need to change for a conservative investor, but aggressive investors should assess the magnitude and timing of planned withdrawals from their accounts.

If a retiree is only withdrawing a small percentage of an account’s value, the withdrawals may be sustained by income—that is, dividends, interest and similar predictable distributions. Most retirees have to take withdrawals that exceed the income being generated by their accounts, which results in dipping into their investment capital.

Retirees who are not withdrawing all the income generated by their combined accounts may be withdrawing more heavily from one or more accounts while not withdrawing from others. For example, someone with a non-registered account, a tax-free savings account (TFSA) and a registered retirement savings plan (RRSP) may be withdrawing from their non-registered and RRSP accounts, while continuing to contribute to a TFSA.

So, as retirees approach and enter retirement, it can be beneficial to look at how much they may be withdrawing from which accounts and when those withdrawals may be anticipated. This can help assess risk tolerance and time horizon on an account-by-account basis, while considering overall risk tolerance and time horizon across accounts.

Capital return vs dividends

Many investors and commentators embrace dividend investing at different stages of their saving journeys, and especially as they enter retirement. Income exchange-traded funds (ETFs) and mutual funds tend to focus on dividend stocks, real estate investment trust (REITs), corporate bonds, preferred shares and other high-yielding securities.

It is important to point out that just because one stock pays a higher dividend than another, it does not necessarily mean it will generate a higher return. In other words, a stock could pay no dividend and provide a better short-, medium- or long-term return than a high-yielding stock.

Berkshire Hathaway is a great example of a stock that does not pay a dividend. Warren Buffett’s company buys other companies in a variety of industries that are profitable and generate significant cash flow. Rather than paying that cash out as dividends to investors, Berkshire Hathaway uses it to buy other companies to generate a return for shareholders through capital growth. Apple is another example of a company with a low dividend that has generated a high historic return.

Dividend vs growth stocks: Which is better?

The board of directors of a publicly traded company decides whether to pay cash out as a dividend to shareholders or use that money for another purpose, like growing the company’s profits. As profits grow, so, too, does share price.


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