Replacing a $75,000 salary in retirement isn’t as simple as finding an investment yielding 7.5%. On a $1 million portfolio, that’s the blended yield you’ll need before taxes, and only a few asset classes can sustainably produce that level of income on their own without taking substantial risk. That’s why I generally prefer a barbell approach.
One side of the portfolio can target higher income using options-based equity strategies, while the other emphasizes stability through high-quality bonds. Today’s portfolio takes an unconventional approach by allocating 40% to a Nasdaq-100 income ETF and 60% to a national municipal bond ETF, both screened for tax efficiency.
NEOS Nasdaq-100 High Income ETF (QQQI)
The NEOS Nasdaq-100 High Income ETF (QQQI) combines exposure to the Nasdaq-100 with an actively managed options strategy. Rather than relying on equity-linked notes, the fund writes index options that qualify as Section 1256 contracts while also utilizing tax-loss harvesting throughout the portfolio to improve after-tax outcomes.
That tax management has been meaningful. According to the fund’s June 19a-1 notice, approximately 98% of the most recent distribution was estimated to be return of capital, with only about 2% classified as investment income. Return of capital generally is not immediately taxable. Instead, it reduces your adjusted cost basis and defers taxes until shares are eventually sold. Investors should remember that 19a-1 notices are only estimates, with the final tax treatment determined after year-end and reported on Form 1099-DIV.
QQQI currently offers a 14.11% distribution rate after its 0.68% expense ratio. This figure annualizes the fund’s most recent monthly distribution and divides it by the current net asset value. Allocating 40% of a $1 million portfolio ($400,000) would currently generate approximately $56,440 annually, or about $4,703 per month, before taxes and future distribution changes.
For investors planning monthly cash flow cadence, QQQI’s most recent July distribution schedule consists of a declaration date of Tuesday, July 21, an ex-dividend date of Wednesday, July 22, and a payment date of Friday, July 24.
iShares National Muni Bond ETF (MUB)
The iShares National Muni Bond ETF (MUB) provides the stabilizing side of the portfolio. This ETF tracks the ICE AMT-Free US National Municipal Index for a very low 0.05% expense ratio while maintaining high overall credit quality. Every holding is rated investment grade, with roughly 59% of the portfolio carrying AA credit ratings.
MUB currently offers a 3.35% 30-day SEC yield. While that may appear modest beside QQQI, the income is generally exempt from federal income taxes and the Alternative Minimum Tax. For investors in the highest federal income tax bracket, iShares estimates this is equivalent to a taxable yield of approximately 5.67%.
Using 60% of the portfolio ($600,000) produces approximately $20,100 annually, or about $1,675 per month, while providing a safer counterbalance to QQQI’s technology-heavy equity strategy. Its distribution schedule also naturally staggers the portfolio’s cash flow. For July, MUB went ex-dividend on July 1, with payment following on Tuesday, July 7.
Putting It Together
Combined, this portfolio currently generates approximately $76,540 annually, or roughly $6,378 per month, before taxes where applicable and before any future changes in distributions. QQQI provides the majority of the income but also carries considerably higher equity and options risk, while MUB serves as the portfolio’s stabilizer through high-quality municipal bonds and federally tax-exempt income. Re-balance annually and try to not tinker!
The specific funds are also flexible. If you’d rather not concentrate your equity exposure in the Nasdaq-100, NEOS offers similar tax-managed income ETFs based on the S&P 500 and the Russell 2000 that follow the same general approach. Likewise, if you’re willing to assume more credit risk on the bond side in exchange for additional tax-free income, higher-yield municipal bond ETFs from providers such as VanEck invest in below-investment-grade securities while still retaining the same federal tax advantages.
Contact [email protected] for any questions or corrections.
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