Harvest Portfolios Group

Retirement Income: Equity Income ETFs Could Offer Monthly Payments and Potential Upsides

November 14, 2022

By Harvest ETFs

Retirement income is usually top of mind for those who are closing in on their retirement age. But with so much economic uncertainty these days around interest rates and inflation, their worries are only getting bigger.

According to data by Statistics Canada, as of August 2022, approximately 307,000 Canadians have retired within the past 12 months. This is a record figure, up from 233,000 reported a year earlier.

The number of Canadians going into retirement is also expected to increase as the youngest baby boomers make up the largest portion of the entire baby boomer population—those born between 1946 and 1964. Statistics Canada reported that in August 2022, 11.9% of permanent employees were planning to leave their jobs within the next 12 months. At the beginning of the year, this figure was just around 5.5%.

Thanks to financial innovations, though, when it comes to retirement income, there are avenues that could help retirees generate a decent income in their golden years.

The Legacy Ways of to Generate Retirement Income

A few of the well-known ways individuals can generate retirement income include securities and accounts like high interest savings accounts, fixed income assets like bonds, insurance policies, annuities, and so on and so forth. 

While these legacy solutions to generating retirement income are great, low risk, and financial advisors may swear by them, sadly, they do come with some big flaws.

Take high interest savings accounts, for example. A person would be very fortunate if they are able to find an interest rate on these accounts that’s higher than the rate of inflation. The rate offered on these accounts tend to be extremely low. So, you’d need a lot of savings to begin with in order to make decent income, and your savings could diminish quickly due to forces like  inflation, as well. And, since inflation is high these days, the savings could get wiped out significantly quickly.

With fixed income assets like bonds, timing becomes everything. These days, as inflation has soared and central banks are raising interest rates to tame it, fixed income assets may be something investors consider. However, for over a decade the income those products paid was relatively low. For those five years away from retirement, for example, fixed income securities could be a viable option to consider in case inflation gets under control and there’s an economic slowdown. Central banks will be forced to lower rates, and this could directly impact a person’s retirement income.

The Enhanced Way of Generating Retirement Income

In their retirement years, Canadian can generate higher income than what is generally offered by legacy solutions through equity income ETFs, and these investment vehicles come with great advantages as well.  

What are equity income ETFs? The idea behind them is simple yet effective. An equity income ETF holds a portfolio of stocks and adds a covered call strategy to generate monthly income. As a primer, a covered call strategy is when call options are written/sold on existing holdings. The seller of the option gets a premium/income in exchange of a promise to sell their stocks at an agreed upon price in the future. It’s a strategy that allows investors to generate income from stocks that may not even pay dividends.

These equity income ETFs tend to provide annualized income that’s much higher than a person would get with fixed income securities and beat the inflation rate in Canada. Here’s the kicker: with equity income ETFs, retirees also get to participate in a portion of the upside as well, in case holdings of the portfolio increase in value. Plus, these equity income ETFs are managed by professionals and provide diversification that could be hard to achieve as an individual investor.

Furthermore, individuals have a lot of different options when it comes to equity income ETFs. They have the ability to choose different sectors and exposure to equities from other countries. This essentially allows individuals to move their retirement savings around given economic cycles, risk tolerance, and preferences.

For instance, Harvest Canadian Equity Income Leaders ETF focuses on providing steady monthly income by handpicking and owning Canadian stocks from industries like banking, telecommunication, energy, and utilities. On top of this, it employs covered call strategies. This equity income ETF gives individuals exposure to Canadian stocks and could offer solid retirement income.

On the other hand, Harvest US Bank Leaders Income ETF gives investors exposure to U.S. banks, which are competitive and could be lucrative investments. The ETF uses covered call strategies to provide monthly income.

The Harvest Healthcare Leaders Income ETF holds an equally weighted portfolio of 20 large-cap global healthcare companies and adds covered call strategies to it. This results in monthly income and investors have the ability to profit from advancement in the healthcare sector.

The Final Verdict…

When it comes to retirement income, there isn’t really a one-size-fits-all approach. At the end of the day, a lot is dependent on how much a person has saved over the years for their retirement, their income expectation during their retirement years, and how the overall economic environment looks. Equity income ETFs could provide an edge and help boost retirement income.

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