Q: We are retired and need a monthly cash flow. I am searching for a good vehicle and need your input. We need about $600 per month from a monthly income product like C.I. or Fidelity Monthly Income Fund or perhaps a monthly paying ETF? Would you know of a few solid prospects?—Louise
A: You and millions of other Baby Boomers are in search of the same thing, Louise—a monthly income. Some rely on government pensions alone. Others have private pensions. But when your primary source of retirement income is your investments, you’re tasked with creating your own pension.
The financial industry is on to this. The marketplace is chock full of investment products with names that include the words “income” or “guarantee” and sound very secure and pension-like.
One thing that I think investors like you need to be cognizant of is that the name of an investment product doesn’t necessarily tell the whole story. An income fund is typically about half in stocks and half in bonds, not unlike a “balanced fund” or any other balanced investment portfolio.
In other words, there are hundreds of investment products that you and your husband could choose from to accomplish your goals, including building your own balanced portfolio with a combination of pure equity and pure fixed income funds, whether mutual funds or ETFs.
Beyond that, you could use individual stocks, bonds, preferred shares and GICs, either with an investment adviser or on your own to build a comparable income-generating portfolio.
There are a lot of monthly-pay ETFs that issue dividends to investors every month. Most of them are 100% equity ETFs. One thing to be careful about is thinking that somehow these investments are safe simply because they pay a monthly income. You have to look at the underlying investments when evaluating any product to make sure you guys actually want 100% stock exposure in a product like this.
There’s usually no magic to income funds or monthly-pay ETFs. The name of the investment or the frequency with which it pays out income may not necessarily make it appropriate or any better than a myriad of other different ways to construct an investment portfolio.
One of the mutual funds you suggested has an annual management expense ratio of 2.29%. That’s a tough hurdle to surpass for the approximately one-half of the portfolio in fixed income that’s not yielding much more than 2.29% in the first place. So I think you need to be wary of the price you’re paying to accomplish your goals, Louise.
If you’re a do-it-yourself investor, I’d argue you’re better off considering a combination of an all equity fund and GICs in the current low interest rate environment, because at least you’re not paying fees on the GIC returns. Or use a low-cost, short-term bond ETF in place of GICs. Paying fees on fixed income has to be worth it.
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Which mutual fund or ETF or other investments you should invest in to fund your cash flow needs is a complex question that doesn’t have a simple answer, I’m afraid. It depends on the asset allocation for the rest of your investments, your tax rate, your estate plans, your risk tolerance, your long-term retirement cash flow needs and whether or not you work with an investment adviser or you’re a do-it-yourself investor.
The most specific and direct advice that I can give you today, Louise, based on what you’ve told me, is that you should be careful about investing in any mutual fund that has bond exposure due to the fees. Beyond that, you should make your investment choices based on a thorough review of your retirement needs and your overall investment portfolio. Choosing an investment in isolation solely to generate the income you think you need to fund your cash flow may be putting the cart before the horse.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products.