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There’s so much to learn about investing for Canadians new to it. But where do you start? Investing is a long-term game that can create serious wealth for you. Here are some tips to help boost your retirement nest egg. Retirement savings have to do with how much you’re saving, the asset mix of your investment portfolio, and tax savings you can take advantage of.
Save early and regularly
Everyone has got to start somewhere in building their nest egg. The idea is to save regularly on every paycheque and even save a percentage of any bonuses you receive. The more you save the earlier, the better. I’ll illustrate with the following scenarios.
Joanne and Joe are twins. Joanne started saving $500 a month from age 23 to 33, compounding returns at 8% per year. Her nest egg grows to $86,919.37 at age 33 when she stopped saving but continued to let her nest egg compound at 8% annually. At age 43, her investment portfolio grows to $187,652.40 and at age 53, it is $405,127.46. At the normal retirement age of 65, her portfolio pasts the $1 million mark at $1,020,179.86. In total, Joanne put in $60,000 ($6,000 x 10 years) of savings.
Joe started saving 10 years later than Joanne at age 33 when he was able to invest $500 a month compounded at 8% per year. At age 43, his investment portfolio grows to $86,919.37. At age 53, his nest egg is at $274,571.79. At the normal retirement age of 65, his portfolio reaches $805,281.22. Not only is his retirement nest $214,898.64 lower than Joanne’s. He also ended up putting in total savings of $192,000 ($6,000 x 32 years).
This illustrates the significance of early savings. If Joanne had continued with saving and investing $500 a month from age 33 to 65, her retirement nest egg would have only amounted to $1,825,461.14. Her nest egg could have been more massive if she had invested more when she was able to later in her career.
Invest for higher returns
By changing your asset allocation, in the long run, you can make more money with potentially increased risk in real estate, bonds, and stocks or make less money with greater reliability (via cash, guaranteed investment certificates). Mutual funds and exchange traded funds can reduce risk by providing diversification.
Stocks are riskier investments that have historically delivered the highest long-term returns. For reference, in the last 10 years, the Canadian and U.S. stock markets have delivered total returns of about 8.2% and 12.3%, respectively.
XIU and SPY Total Return Level data by YCharts
You can tweak your asset mix to target different returns while diversifying your risks. Typically, higher risk investments could lead to higher returns. The higher your rate of return and the longer your investment horizon, the greater your nest egg can grow.
A low-risk, defensive dividend stock you can investigate is Fortis (TSX:FTS). It outperformed the Canadian stock market by delivering close to 10% per year over the last decade. It has been sustainably increasing its dividend for the last 49 years or so.
Through 2027, the predictable regulated utility is targeting a dividend growth rate of about 5%. It currently offers a dividend yield of close to 4.2%. So, FTS stock can deliver total returns of approximately 9% per year over the next few years. According to its usual schedule, it will be increasing its dividend at the end of this month, equating to a forward dividend yield of almost 4.4%.
Use tax-advantaged accounts
The returns discussed above assume a no-tax environment, whereas we have to pay income taxes for our investment income and booked gains, unless the investments are in tax-advantaged accounts. So, eligible Canadians should use these accounts strategically for substantial tax savings: Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP), and First Home Savings Account (FHSA).
