Income for Retirement 2 Closed End Funds

Income for Retirement: Understanding Closed-End Funds

Throughout our working lives, we depend on income to sustain our lifestyles. Why should things be different during retirement?

No matter our age, we must pay bills, purchase food, and allocate resources for travel; these things will never fade away.

Therefore, we need to create a consistent paycheck to match or exceed our monthly expenses—enter closed-end funds (CEFs). 

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With CEFs, we can purchase high-quality income generators that offer higher-than-normal yields. But what are the risks?

Welcome back to the Income for Retirement Series (Preferred Shares), where we create enough income to thrive during retirement.

What are Closed-End Funds? Closed-End Funds are bundles of securities packaged under one roof—very similar to exchange-traded funds (ETFs).

The primary difference between ETFs and CEFs is that CEFs offer a limited amount of shares (earning them the term “closed”).

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ETFs expand and contract as money flows in and out of them. CEFs have a set number of shares, which gives them a Net Asset Value or NAV.

A CEF can trade above (premium) or below (discount) its NAV at any time. Savvy investors will hunt for times when they can find great CEFs selling a discount to NAV.

However, the best CEFs can trade above NAV simply because investors seek these securities above others. Your main priority is matching your CEFs to your needs.

How much income do you need? CEFs are my favorite way to pay bills throughout retirement because you can find high-yielding monthly payers.

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Let’s say you have $1,000/month of utilities and household expenses. It could be prudent to cover these bills with monthly CEF income.

Closed-End Funds are easy to understand, with the main takeaway being they use leverage. This means they are susceptible to interest rates and commodity super cycles.

CEFs versus Treasury Bonds. Retirees usually retreat to treasury bonds during retirement to protect capital. In fact, protecting wealth is their number one concern.

However, their primary concern should be generating enough income to pay expenses while beating inflation.

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Although earning 5% on Treasury Notes sounds good right now, inflation and cost of living hikes can erode that five percent rather quickly.

Inflation doesn’t always act alone. Currently, there has been a spike in home insurance premiums, and gas prices may increase over the winter.

Retirees need to earn high yields to insulate them from random price-gouging tactics in our “very capitalist” nation.

Retirees should have a fully-funded (1-2 year) emergency fund. Once they have enough CEF income, they can reinvest 25% into the portfolio and use the extra to buy government bonds.

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Finding the right CEFs for your portfolio. Closed-End Funds come in all shapes, sizes, and yields; therefore, it’s imperative you hit the books to find what’s right for you.

  1. Bond Funds- My favorite type of CEFs are bond funds run by PIMCO. These feature high-yield junk bonds and mortgages. My favorites are PDI, PDO, and PTY.
  2. CLO Funds- Raising on my list are Collateral Debt Obligation Funds such as ECC, OXLC, and XFLT.
  3. Municipal Bonds- Muni Funds can sometimes be exempt from Federal taxes. I use NVG.
  4. Infrastructure and Utility- For consistent infrastructure and utility income, I use UTF and UTG.

There are lots more CEFs to explore, such as those in real estate, preferred shares, and medical fields. You can shop until your heart’s content.

Using CEFs in retirement. There are many ways to use CEFs in retirement; however, it mainly depends on how your brokerage handles dividends.

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M1 Finance would be an excellent brokerage to use with a portfolio of CEFs. You can piece together 8-10 CEFs in a M1 Finance pie.

Let’s say you get the portfolio to yield $1,000 monthly in CEF income. You could set up M1 Finance to collect $800 and transfer it to your banking account on the first of the month.

M1 Finance would automatically reinvest the remaining $200 across the pie, ensuring you continue to grow your pot of income every month.

Before you know it, you will have $250/month invested in your pie. When you need to increase your expense budget, it’s as simple as editing your preferences.

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CEFs can allow you to create the paycheck you need to live your best life in retirement, but what are the risks?

Long-term CEF investing. Closed-End Funds utilize leverage (loans) to increase their returns. Leverage makes good returns great and bad returns horrible.

There will come a time when your CEF is out of favor, so prepare yourself now. You only need to purchase high-quality CEFs and focus on the income.

Use the rule of 72 as your guide. Dividing 72 by the yield tells you how long it’ll take to receive your initial investment back (or double your investment).

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For example, it’ll take 7.2 years to receive your investment back at a 10% yield. Each month, your CEFs are working toward paying you back.

Your CEFs will ultimately pay back your initial investment, and you will have an infinite return.

By focusing on the income, not the prices, you set yourself up to enjoy retirement. In fact, you don’t need to follow the stock market daily (more like monthly).

Conclusion. Closed-End Funds give you the income to pay expenses, travel, and give to charity. You can be your best self when you have the means to provide and thrive.

Passive Income: How Do You Spend Your Free Time?

Investing in high-flying stocks like Tesla (TSLA) and Nvidia (NVDA) sounds good, but how would you generate income?

The only way to create a paycheck from these stocks is to sell shares. Therefore, each month, you are depleting your resources until, one day, you are empty.

Closed-End Funds keep the income coming without needing to sell shares. Plus, if you reinvest 25%, you’ll keep growing your income year over year.

When you look at market charts, CEFs look a little shaky. However, I have been using CEF income for four years, and they have changed my life. Thanks to CEFs, it’s raining money in my account. Good Luck!

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing


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2 responses to “Income for Retirement: Understanding Closed-End Funds”

  1. […] say you purchase $1,000 of the PIMCO Dynamic Fund (PDI) closed-end fund every month, which currently yields 13%. You would add $10 to your income every month because PDI […]

  2. […] products to accomplish this feat: business development units, dividend ETFs, mortgage REITs, closed-end funds, preferred shares, and high-yield dividend […]

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