Planning for retirement? Several questions might be bubbling in your mind. Which account should you choose, and which investment securities should you buy? Here are three easy steps that can help you retire as a millionaire:
- First, set aside a certain amount every year for your retirement.
- Second, plan your investment and taxes simultaneously.
- Third, determine your retirement amount and select the stocks accordingly.
Your annual contribution to the million-dollar retirement
You will be surprised to know that as little as $100 a week can make you a millionaire in 25 years. Let’s do the math.
If you save $100 a week, it will convert into $5,200 in a year, $52,000 in 10 years, and $135,200 in 25 years. Every year, if you invest this $5,200 in a stock that generates a 13% annual return, you will have a million dollars after 25 years. This is when your contribution is stagnant.
In the real world, that is not the case. As you grow in your career, your income and expenses increase. If you increase your annual contribution by 5% every year, it will grow to $248,000 in 25 years. However, there might be years when you are out of a job or have some crisis that forces you to withdraw money from your retirement savings. You can fill the gap from your withdrawals later by investing more.
Retirement and tax planning go hand in hand
Taxes are a very important part of your retirement planning. The Canadian government gives you two options:
- You can pay the tax now and enjoy future tax-free withdrawals through your Tax-Free Savings Account (TFSA).
- You can skip your tax now and pay them on future withdrawals through your Registered Retirement Savings Plan (RRSP).
The TFSA is a good choice for your high-growth, high-dividend stocks, as your investment income would be way more than your contribution. Moreover, it is also a good account for lump-sum withdrawals, as they would be tax-free. For instance, you can fund your international holiday or any financial crisis from your TFSA withdrawal.
The RRSP is a good choice for defensive and low-risk dividend stocks, as they can give you decent earnings over a longer period. It is a good account to withdraw passive income every month for your living expense, as this money will be added to your taxable income. If you limit your withdrawals to the minimum tax bracket, you can save on your tax bill.
Which stocks should you buy?
You can leverage TFSA and RRSP to minimize taxes. You can create a balanced portfolio of growth and dividend stocks. If you have at least 20 years before retirement, you can invest in high-growth tech stocks like Constellation Software (TSX:CSU) and Kinaxis through your TFSA. These stocks are growing at an average annual rate of 30-40% and can help you with your lump-sum financing needs.
Constellation Software grows revenue and cash flows through acquisitions. Even after 25 years, it is growing its revenue and adjusted EBITDA by double digits. The stock’s growth rate is slowing as the company matures. However, it still has the potential to make you a millionaire. If you have $69,500 in your TFSA, invest it in Constellation. It can grow your money to $1 million in 12-14 years.
For your RRSP, you can choose a good dividend stock like RioCan REIT (TSX:REI.UN) or CIBC. RioCan is Canada’s second-largest retail real estate business. It earns regular cash flows from rent and distributes it to shareholders as dividends. It has a 20-year history of paying regular and stable dividends every month.
If you are at the peak of your career and have a heavy tax bill coming up this September, max out your RRSP contribution ($26,500, or 18% of your income, whichever is lower) and put it in RioCan or CIBC. They currently have high dividend yields of 9.58% and 5.67%, respectively, as the pandemic has impacted their stock prices. By investing now, you can lock in this high yield for a lifetime.
You can withdraw some amount from your RRSP if you are unemployed and need money for your living expenses. This will help you minimize your taxes.
