Investors: Here’s How to Make $750 Each Month in Retirement

A golden retirement involves much more than just scraping by on Canada Pension Plan (CPP) and Old Age Security (OAS) payments.

Setting yourself up for financial success early on is crucial, and that’s where tools like a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) come into play. Compounding returns on a diversified portfolio over the years can amass a significant nest egg, enabling you to truly enjoy your later years.

But what if you’ve already crossed the retirement threshold? While passive income is the dream, generating it isn’t always straightforward. You could sell off stocks and make withdrawals, but many investors are not keen on reducing their holdings. Dividend income is another option, but the yields may not be sufficient to meet your financial needs.

That’s why I’m here to present an alternative: Generating $750 each month in retirement through a covered call exchange-traded fund (ETF). It offers a consistent income stream and is less reliant on selling assets or hoping for high dividend yields. Here’s how it works.

Covered call 101

Imagine you have an apple tree in your backyard that grows beautiful, juicy apples every year. You have a neighbour who loves apples and believes your tree will produce a particularly bountiful harvest next season. You agree to sell your neighbour the right to buy your apples at a predetermined price, and in return, your neighbor pays you a small fee upfront.

In this analogy, the apple tree represents a stock you own, and the small fee from your neighbor is akin to the income you earn from selling an option. The predetermined price is known as the “strike price,” and your agreement with the neighbor is like a “covered call.” You’re “covering” your obligation to sell by already owning the asset in question (the apple tree, or in the stock market’s case, shares of the stock).

Covered call ETFs use this very strategy—selling options to collect income. Essentially, these ETFs are willingly giving up some of their future growth potential in exchange for immediate income in the form of option premiums.

Covered call ETFs are generally not ideal for growth-focused investors because you’re sacrificing the potential for significant upside. However, if you’re an income investor, especially one in retirement or approaching retirement, these ETFs can provide a steady, higher-yield income stream, making them an attractive option to consider.

My ETF pick

Selling covered calls can be a complex and advanced investment strategy, which is why I’d rather leave it to the professionals. One such vehicle that takes the headache out of managing this strategy is the BMO Covered Call Canadian Banks ETF (TSX:ZWB). This ETF employs a covered call strategy on an equally weighted portfolio of six big Canadian banks.

What really stands out about this ETF are its monthly dividends, which offer an immediate and recurring income stream. As of September 15, the ETF has an impressive annualized yield of 7.57%. This yield is particularly attractive for those looking to augment their income, especially during retirement or in preparation for it.

To create $750 every month in passive investment income from ZWB, an investor would have to invest $108,062 in ZWB, assuming the current monthly payout remains consistent moving forward: