Retire Rich: How to Build a $1 Million RRSP

Industry leaders such as Royal Bank of Canada (TSX:RY)(NYSE:RY) have helped make some of their long-term shareholders rich. Here’s how investors can create a winning RRSP portfolio.

| More on:

Retiring rich means different things to different people, but most would argue that a $1 million RRSP is adequate to enjoy life in the golden years.

Getting to that point might seem impossible, but it is actually quite achievable for the average couple who manages to set aside a steady amount of money through their working lives.

The great thing about the RRSP is that the contributions can be used to reduce taxable income in the year they are applied. The tax savings can go a long way when you are younger and if retirement planning is done carefully, the funds will be taxed at a lower rate when withdrawn than they would have been at the time of the contribution.

In addition, the investments can take advantage of the compounding process to grow over the years, turning relatively small initial contributions into a large retirement fund.

Which stocks are good picks for your RRSP?

The best companies tend to be market leaders with strong competitive positions and long track records of dividend growth supported by higher profits.

Let’s take a look at Royal Bank of Canada (TSX:RY)(NYSE:RY) to see why it might be a good pick to get you started.

Earnings

Royal Bank earned $12.4 billion in net income in fiscal 2018. That’s right; the Canadian financial giant, which has a market capitalization of $155 billion and is deemed too big to fail, pulls in a cool billion in profit every month.

The secret to the bank’s success lies in its diversified business units. Royal Bank is a strong player in personal and commercial banking, wealth management, insurance, capital markets, and investor and treasury services.

It has operations around the world and spent US$5 billion about four years ago to boost its private banking presence in the United States when it purchased California-based City National, also know as the banker to Hollywood’s stars.

Royal Bank knows it has to invest in digital products and solutions to remain competitive in the changing world of digital banking. Young customers prefer to use mobile apps, and getting loans approved quickly for home and businesses owners helps keep customers from leaving.

Royal Bank has the financial depth to make the required investments and is already seeing the benefits through rising adoption of its digital services by its clients.

Dividends

The bank anticipates earnings will grow at 7-10% per year on a per-share basis. That should support ongoing dividend increases in the same range. The current dividend provides a yield of 3.9%.

Returns

Buy-and-hold investors have done well with the stock. A $70,000 investment in Royal Bank 20 years ago would be worth more than $1 million today with the dividends reinvested.

The bottom line

A Canadian couple could reasonably each have $35,000 in RRSP investments and see the combined funds grow to $1 million in a couple of decades.

There is no guarantee Royal Bank will generate the same results in the next 20 years, but the stock remains a top pick to anchor a self-directed RRSP portfolio, and the strategy of owning quality dividend-growth names is a proven one.

There are several stocks in the TSX Index that have generated comparable or ever stronger returns over the same timeframe.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stock mentioned.

More on Bank Stocks

ways to boost income
Bank Stocks

2 Undervalued Canadian Bank Stocks to Buy Now

These Big Six Banks offer growth potential and reliable dividend payments.

Read more »

Man holds Canadian dollars in differing amounts
Bank Stocks

Got $1,000? BNS Stock Can Turn it Into a Passive-Income Stream

Down more than 20% from all-time highs, Bank of Nova Scotia currently offers a tasty dividend yield of over 6%…

Read more »

dividend growth for passive income
Top TSX Stocks

1 Magnificent Canadian Stock Down 9 Percent to Buy and Hold Forever

There are some really great stocks on the market for any portfolio, but this one magnificent Canadian stock screams buy.

Read more »

Paper Canadian currency of various denominations
Bank Stocks

Is BNS Stock a Buy, Sell, or Hold for 2025?

Bank of Nova Scotia (TSX:BNS) is one of Canada's big bank stocks, but should you buy, sell or hold BNS…

Read more »

A worker uses a double monitor computer screen in an office.
Bank Stocks

Is BNS Stock a Buy for its Dividend Yield?

Bank of Nova Scotia is up nearly 30% in the past year. Are more gains on the way?

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »

how to save money
Bank Stocks

This 5.9% Dividend Stock Pays Cash Every Month

First National Financial (TSX:FN) has a 5.9% yielding dividend that is paid out monthly.

Read more »

cloud computing
Tech Stocks

Best Stock to Buy Right Now: Manulife vs CIBC

Want the best stocks? These two are certainly the best options. But which is the better buy?

Read more »