Q: As a retiree, I need to maximize my return on investments. I notice there are a number of income trusts that have significant yields and I was wondering if there is an ETF made up of income trusts. While I know this income is fully taxed my plan was to keep such an ETF in a TFSA. I have a REIT ETF in my TFSA now, but was looking for greater diversification. Can you help? — Gloria
A: Income is indeed important in retirement. Retirement could be seen as income that starts once your work income stops. However, focusing on income-generating investments is an oversimplification that is pandered to (and at times exploited by) the financial services industry.
For your portfolio, it’s real returns that matter (returns after tax, fees and inflation). Real returns determine your retirement account’s vitality as you get older, ability to keep up with inflation, and success in meeting your spending expectations during retirement. Income within a portfolio is only one part of returns. Yes, there are tax differences between interest income, dividends, and capital gains (there are use-of-accounts strategies to handle these differences), but a myopic focus on income is unlikely to maximize overall real returns.
Many funds and investment structures promise high distributions while making no promise that these distributions won’t simply be returning portions of your own initial investment (it’s called return of capital—and yes it’s perfectly legal).
You don’t need yield and you don’t need fund distributions. What we all need is solid real returns and a sound retirement plan, including a realistic retirement spending budget.
Tax changes in 2011 caused most income trusts to reorganize—this left real estate investment trusts (REITs) as the principal income securities on the TSX. You should resist adding Canadian REIT ETFs to your portfolio. As you’ve noticed they certainly won’t help with diversification. You’ll end up with REIT’s by owning most Canadian Equity funds anyway, as most Canadian companies that are not REIT’s hold real estate assets on their balance sheets. To top it off if you own a house (especially in Vancouver or Toronto) you likely have more Canadian real estate exposure than anyone might have imagined was possible. Certainly not wise.
Your best strategy is to create a portfolio that will give you the best chance at achieving strong long-term real returns and don’t be too concerned with investment income.
Ian Collings is a Certified Financial Planner and Chartered Financial Analyst at Collings Financial
MORE STORIES LIKE THIS:
- Under the Hood: Vanguard FTSE Canadian Capped REIT (VRE)
- Build a portfolio you can ‘set and forget’
- Sign up for our investing newsletter