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Building your retirement nest egg? Focus on long-term real returns and don’t be too concerned with investment income
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.
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