A lot of retirees who prefer spending their time doing things other than investing may have had the happy little accident of simply leaving their money parked in low-cost index ETFs and letting them ride.That would have worked out pretty well for capital appreciation. According to the S&P Indices Versus Active, or SPIVA, results, most active funds still lag their benchmarks over long periods. By investing passively, you generally stack the odds more in your favour.
But once you have accumulated $750,000, or three quarters of a million dollars, the focus often shifts. Growth still matters, but capital preservation and income start becoming more important. That is where I think retirees need to be careful. A lot of higher-fee alternative income products, especially covered call ETFs, can look attractive because of their headline yields. But many also cap upside, produce weaker total returns, and create tax complications.
If you are looking for income from a sizable retirement portfolio, there is still a strong case for keeping things simple. Realistically, you can build a decent income stream to supplement Social Security and 401(k) withdrawals using just two ETFs in a 50/50 allocation: one from iShares and one from Charles Schwab.
The Two ETFs I Would Use
The first ETF is the iShares Short-Term National Muni Bond ETF (NYSEARCA: SUB). This ETF tracks a broad portfolio of short-term municipal bonds. It currently holds thousands of muni bonds with an average duration of about 1.82 years, which means it has relatively low sensitivity to interest rate changes.
The credit quality is also strong. Most of the portfolio is rated AA or AAA, with the rest spread across A, BBB, and cash. Because this is a national municipal bond ETF, its holdings come from issuers across the country, with large exposures to states like California, Texas, and New York.
The big appeal is tax efficiency. SUB’s 30-day SEC yield is exempt from federal income taxes, which can make its after-tax yield more attractive than the headline number suggests, especially for retirees in higher tax brackets. It also charges a low 0.07% expense ratio.
The second ETF is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD). SCHD tracks the Dow Jones U.S. Dividend 100 Index. The strategy starts with companies that have paid dividends for at least 10 consecutive years. From there, it screens for free cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate.
The result is a large-cap value tilted portfolio with decent quality characteristics. SCHD’s portfolio of 100 stocks currently trades at a lower price-to-earnings ratio than the S&P 500 at 19.98x while maintaining strong return on equity of 28.84%
It also pays a 30-day SEC yield around 3.28% as of May 18th. Because SCHD excludes real estate investment trusts (REITs), much of that income is generally qualified dividends, which can be more tax efficient than ordinary income.
How Much Income Could This Portfolio Generate?
A 50/50 split between SUB and SCHD produces a weighted average 30-day SEC yield of 2.95%. On a $750,000 portfolio, that works out to $22,125 per year in estimated income. That breaks down to roughly $5,531.25 per quarter, or about $1,843.75 per month on average. The actual payout timing will not be perfectly smooth. SUB pays monthly, while SCHD pays quarterly. This is just an averaged-out figure to make the cash flow easier to visualize.
The tax angle is the real point here. SUB’s income is exempt from federal income tax, while SCHD’s dividends are generally qualified. For retirees, what matters is not just what the portfolio pays, but what you actually keep after taxes. The weighted average expense ratio is also very low at 0.05%. For a $750,000 portfolio, the annual fee drag is just $375.
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