A fund that pays 12% a year looks like an easy answer to retirement income. The payout is only part of the return. This post covers how to tell yield from total return, where high-yield securities fit in a retirement plan, and what changes if you plan to retire in India. The comparison between an 8% yield and a withdrawal rule is in The 4.7% rule vs an 8% yield.
1. Yield and total return
The most common error with high-yield securities is to treat the yield as the return. The yield is the cash a security pays each year as a share of its price. The total return is that cash plus or minus the change in the price.
A fund that pays out 12% but loses 8% of its value every year returns only 4%. A business development company, or BDC, is a listed company that lends to private businesses. A BDC that pays 11% but sees its net asset value (NAV) per share drop 4% a year gives you a return of around 7%.
YieldDesk 101, a primer on income investing, describes a covered-call fund built on a single stock. A covered-call fund holds stock, sells call options on it and pays out the option income. This one paid out 40% over the course of a year, but its share price fell by 31%. Its total return was only 9%, which is less than the return on the underlying stock.
When a fund pays out more money than it makes, the extra amount comes from the investor's own money. The 4.7% withdrawal rule does the same thing, but as a planned and controlled way of using the principal. A high-yield fund with a falling value also uses up principal, and it is not always clear that it is doing so.
The tax label on the payout might not show it. A payout labeled as "income" might still be using the investor's own money. A payout labeled as "return of capital" might not be a cause for concern.
The clearest check is to compare a fund's total return with its distribution rate over three to five years. If the total return is lower, part of each distribution was a return of the investor's own money.
Playbook Move: Before buying, review the fund's NAV per share over at least five years. If NAV has declined steadily while the fund paid a high distribution, treat part of that distribution as principal. Spend less than the full amount and reinvest the remainder.
2. Where each approach fits
Concentration deserves particular attention in preferred ETFs, which are funds that hold preferred stocks (shares that pay a fixed dividend). A broad preferred index often holds 60% or more of its assets in financial companies. In 2008, and again in March 2023, most bank preferreds fell at the same time. That included preferreds issued by banks that were never in difficulty.
The two approaches can also be combined. Some retirees use income securities to cover fixed costs in the first 10 to 15 years of retirement, while a fixed payment still keeps pace with expenses. A separate growth portfolio, drawn down under a withdrawal rule, provides for rising costs in the later years.
Playbook Move: Count the banks and insurers among your income holdings. If they account for more than half, most of your income depends on a single industry. Use income securities for the years in which a fixed payment still covers your costs, and rely on a growth portfolio for the years after.
3. For NRIs: the country of retirement matters
If you plan to retire in India, either fully or partially, keep two things in mind. They are currency and tax.
Currency
Currency has been a big factor over the five years to October 2026. The dollar has gone up about 4.8% a year compared to the rupee. If you receive a fixed amount of dollars and spend them in India, you get more rupees each year. Because your expenses are in rupees, this has helped make up for the missing inflation adjustment on a fixed payment.
This benefit is not guaranteed. The rupee hit a record low of 96.82 in May 2026. It has recovered a bit since then, but Indian prices are also rising. The overall gain is smaller than the currency movement alone suggests. The longer history is in the rupee's slide against the dollar.
It works the other way around for investments in rupees. Say you have a deposit in rupees that pays 7% interest a year. In 2026 up to October 23, when the rupee closed at 94.93 to the dollar, it had fallen by 5.2%. If you hold the deposit for a year and the rupee falls by that much, you earn only about 1.5% in dollars.
The NIFTY 50 shows the same gap. On that date it was down 13.5% for the year in rupees and 17.9% in dollars. The difference between the two figures is the cost of the weaker currency to a dollar-based investor.
If you plan to spend your money in dollars, convert the interest you earn on your rupee investments into dollars first. Then compare it with what similar investments pay in the US.
Tax
Taxes are the next thing to consider. If you live in the US, dividends from preferred stocks are a way to get income without paying too much in tax. If you live in another country, things change.
If you live in India, for example, you will likely have 25% of your preferred dividends withheld for US taxes, unless you have filled out the right form. Interest from some special kinds of bonds, on the other hand, can be paid out with no US withholding, as long as you have the right paperwork.
Some investment funds can also pay out part of their dividends as "interest-related" payments, which can avoid US taxes too. Not all funds do this, and some brokers might still withhold the tax anyway.
When you retire and move to India, you pay Indian tax on your income on a sliding scale. You can claim a credit for any tax you have already paid in the US.
There is also the RNOR period (Resident but Not Ordinarily Resident), covered in edition 15 and in 401(k) tax after you return to India. During this time, India does not tax a lot of the income that comes from outside the country. The RNOR calculator estimates how long that period lasts for you.
Compliance Alert: When you invest across borders, the details decide the result. The way tax is withheld from your investments depends on the type of security, the fund's own rules, the broker's practices, and your residency status in both countries. Check each of these points with a cross-border tax expert and a chartered accountant before creating an income portfolio. One wrong assumption leads to an error that repeats with every payment.
Playbook Move: If you expect to retire in India, plan the income portfolio around the tax status you will hold after the move. The securities that are cheapest to own in tax terms today may be among the most expensive later.
A checklist before you buy for yield
The checks above come down to five questions. Ask them in this order, because the first two can rule a fund out before tax and currency come into it.
- Is the total return lower than the distribution rate? Compare the two over three to five years. If it is, part of each payment is your own money coming back.
- Has NAV per share fallen steadily? Look at five years or more. If it has, spend less than the full distribution and reinvest the rest.
- How much of the income comes from banks and insurers? If it is more than half, one industry decides most of your income.
- Which currency will you spend in? Convert the yield into that currency before you compare a rupee deposit with a US security.
- What will your tax status be after the move? Ask what the US will withhold from each payment once you live in India, and what India will tax once the RNOR period ends.
From Edition 16 of the NRI Playbook newsletter. For informational purposes only; not financial, tax, or legal advice. For decisions about your specific situation, consult a qualified cross-border tax professional.