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As retirees approach their golden years, the focus on their investment strategies may shift from capital appreciation to income generation.
For many, this means getting into dividend stocks, high-yield funds and other income-focused investments. Still, while appealing, higher payouts can lead to high-risk decisions.
A 70-year-old close to retirement with $600,000 in his IRA is contemplating allotting a portion of his portfolio to JPMorgan Equity Premium Income ETF (NYSE:JEPI) to increase his monthly income. His portfolio consists of individual stocks from large, dividend-paying companies and it earns him a 5% yield.
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“I receive monthly withdrawals of the dividends, which I use to supplement my pensions. Since the disbursements are coming from a traditional IRA, they’re taxed as ordinary income,” the investor wrote on Reddit.
The poster mentioned that he’s aware that JEPI’s dividends are not qualified but says that since his IRA withdrawals are taxed as ordinary income, this is not a concern. However, he is wondering if he’s overlooking critical factors, especially since he plans on preserving the principal for his children.
“Am I missing/not considering something? Stop me before I do something stupid,” the investor wrote.
The comments on this post provided the investor with plenty of insights, so let’s analyze them.
Is Investing in JEPI a Good Move So Close to Retirement? Reddit Debates
Pros and Cons Regarding JEPI
Many commenters praised JEPI for its proficiency in generating consistent monthly payouts, while others offered alternatives.
“I have a little over 10,000 shares of JEPI, which is most of my IRA. I like JEPI and sleep well as it is well-diversified… Market goes up, market goes down but you still get that income every month,” the very first comment says.
“Since JEPI and [JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ)] are somewhat new, there is skepticism, but I have both and both have been great,” another comment supporting the ETF read.
One Redditor shared his experience with both ETFs and the decision he’s taken regarding both.
“I had about 10% of my portfolio in JEPI and JEPQ (70/30) and I couldn’t stand watching JEPQ smash JEPI every month on the dividend front. When JEPQ hit its lows last year, I dumped all the JEPI, and now that 10% of my portfolio is all JEPQ. I have made so much more than I would have since I made that move, it’s incredible. And I like JEPI,” the Reddit user wrote.
This particular Redditor suggested other investments for the 70-year-old.
“If you want index-type covered calls, look at [Eaton Vance Enhanced Equity Income Fund (NYSE: EOI)], [Eaton Vance Tax-Managed Diversified Equity Income Fund (NYSE: ETY)]. They have a long history and look to be able to keep up with the upswings, which the earlier covered call funds have a tough time doing,” the Redditor’s comment said.
The Trade-Off Between Income and Capital Appreciation
Several Redditors highlighted the importance of balancing income generation with capital appreciation, especially since the poster is so close to retirement.
“Capital appreciation has higher total returns… 10% capital appreciation and 10% dividend yield reinvested results in the same exact financial position, other than tax,” a user said.
“Just understand that the price of the enhanced dividend is you lose a lot of (most?) of the capital appreciation opportunity, but you still have a lot of (not all) the capital loss risk. A 5% average dividend is already a pretty well-hedged position. I tend to be conservative with my investments, but I am only around 3.7% overall dividend yield (65 years old),” a commenter suggested.
One Redditor recommended the investor take notice of his strategy, which includes both capital appreciation and income generation.
“I just recently retired in my mid-60s. I run split strategies in order to be as diversified as possible without overdoing the diversification if you know what I mean… I’m running an income strategy with [cash credit] funds like JEPQ, [Goldman Sachs S&P 500 Core Premium Income ETF (NYSE: GPIX)], [NEOS S&P 500 High Income ETF (CBOE: SPYI)], etc… I also have a large variety of [business development companies] and [collateralized loan obligations],” the Redditor said.
Tax Efficiency and Required Minimum Distribution Considerations
The commenters also addressed the tax implications of holding JEPI in a traditional IRA and the effect of required minimum distribution on the investor’s approach.
“My father is in his 70s and used the dividends from JEPI and JEPQ (and a few other ETFs) to satisfy his RMD for last year from his traditional IRA. We just moved the monthly payments into [iShares 0-3 Month Treasury Bond ETF (NASDAQ: SGOV)] shares every month to gain some limited interest on the idle cash (via monthly dividend reinvestment for SGOV) then sold all the SGOV shares at the end of the year and used the cash to satisfy the RMD,” a user explained.
“Only withdrawing the income will likely result in higher RMD every year until you are forced to liquidate your holdings to some degree,” one Redditor cautioned.
A comment suggested an alternative holding instead of JEPI since it has more tax benefits.
“SPYI offers not only high income but also layers of tax efficiency… Options held at year’s end are treated as if sold at fair market value on the last market day,” the comment read.
