An income strategy for new retirees | HDIF

Date

May 18, 2022

By Harvest ETFs

Retirement IncomeOne third of recently retired Canadians surveyed by RBC insurance said they retired sooner than they planned because of the COVID-19 pandemic. That same survey found that retirees, especially new retirees, are increasingly concerned about affording their retirement.

More than 78% of survey respondents said they were concerned about the impact of inflation on their savings. 47% said they were concerned about a lack of guaranteed income and 48% said they worry about outliving their savings.

All three of these concerns come down to income. New Canadian retirees, many of whom retired early due to COVID, are worried that they don’t have a stable source of income that can overcome the rapidly rising cost of living and last for their whole lifespans.

One income asset class can help with those worries.

Inflation worries come after years of low yielding bonds

The income concerns discovered by the survey should come as no surprise. For the better part of a decade income yields from fixed income investments have been at or near historic lows. Retirees used to live on the income these investments provided but yields at sub 2% levels have been unsustainable.

More recently, rates have begun to rise as central banks attempt to reign in inflation. However, with inflation in spring of 2022 hitting levels above 6%, those rising bond yields are still paying negative real income.

That trend is reflected in the fact that 78% of survey respondents said they were concerned about inflation. Many traditional income sources seem incapable of matching what inflation has done to ordinary retirees’ balance sheets.

Many income sources, but not all.

Equity Income ETFs for retirees

An equity income ETF takes a portfolio of equities—stocks—and uses a combination of dividends and a covered call strategy to generate consistent monthly cashflows for unitholders. This results in an ETF with a target annual yield that can be as high as 8.5%, paid in the form of a monthly cash distribution. These assets can still participate in market growth opportunity, like an ordinary equity ETF, albeit with some growth opportunities limited due to the covered call strategy. The end result is a product paying consistent income with exposure to market growth opportunities.

This product set can be very helpful for new retirees, like those surveyed by RBC, who are concerned about their income. Monthly cashflow paying at a higher annualized rate than bond products can help exceed the increasing cost of living. At the same time, participation in market growth opportunity can mean the value of a portfolio can still rise over time and help deal with the concerns about planning for a longer retirement.  

Because Equity Income ETFs are comprised of stocks, they can cover a wide range of investment strategies to suit different investors’ goals. From defensive sectors like healthcare and utilities, to more growth-oriented sectors like tech, it’s important for investors to choose an ETF that suits their needs. Sometimes these strategies can be combined, as with the Harvest Diversified Monthly Income ETF which invests in 5 individual Harvest equity income ETFs and has a current yield of 9.52% as at May 13, 2022.

The worries expressed by new retirees in the RBC survey point to a market where traditional income sources have become harder to find. As retirees face those worries, they should be aware of the potential equity income ETFs have to deliver higher yields and improve their retirement cashflow outlook.

Disclaimer

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund(s) on the TSX. If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund(s) and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units of an investment fund. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.

Harvest ETFs Announces Increases to Monthly Cash Distributions

Harvest ETFs announced by press release on June 25, 2024 that certain ETFs will increase their monthly cash distribution amount for all classes taking effect for the July 31, 2024 record date with a payable date of August 9, 2024. For more details, please read the press release.

PRESS RELEASE