Canadians looking to retire early pretty much don’t have any other option besides investing. You simply cannot make enough (unless you’re a millionaire) to put aside cash year after year and expect to retire early.
That’s why today we’re going to look at truly passive income that can help you retire by 50. Even if you only have 20 years to do it.
Make automatic contributions
The first step to early retirement is to contribute as much as you can, and often. To do so, I would create automated contributions in line with your paycheques. That way you don’t have to even think about contributing to your accounts; it will just do the work for you.
What’s more, you should be contributing to something like a Tax-Free Savings Account (TFSA). This is the best option since if you desperately need the cash before retirement, you can take it out. From there, make sure you’re contributing to your chosen investments regularly.
For this, I would consider dollar-cost averaging. This is where no matter what happens, you set a time each month, or even in line with that paycheque again, to invest your cash. Over time, the market goes up, and so do stocks. Sometimes you’ll invest when the stock is down and get a deal, while other times you’ll invest when it’s high but see higher returns. Over time it averages out, giving you far more earnings in the process.
Choose the right investment
For the purpose of this article, we’re going to look at one safe stock to choose. However, you should consider having a strong mix of exchange-traded funds (ETF), bonds, guaranteed investment certificates (GIC), and more. This can be done in line with your goals, with the help of your financial advisor.
But here we’ll take a look at the Canadian Imperial Bank of Commerce (TSX:CM). CIBC stock is down quite a lot during this economic downturn. Yet after hitting 52-week lows, the company has surged back to 52-week highs within a year’s time. So you can grab a deal, along with a great dividend yield at 6.7%.
Plus, all the banks have provisions for loan losses, enjoying an oligopoly in the Canadian banking sector. So it’s unlikely you’ll see bank closures such as happened in the United States. Therefore, you can look forward to seeing your cash rise substantially over the next two decades.
Putting it all together
Let’s say you make $60,000 per year and want to create that amount of income during retirement. You want to create enough cash to have $60,000 per year for the next 20 years. This would mean creating a portfolio worth $1.2 million.
To give you an idea of what this could look like, we can look at CIBC stock as an example. With a compound annual growth rate (CAGR) of 5% and dividend CAGR of 6%, let’s see what investing $78,000 in a TFSA and adding $6,000 per year could look like.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | Year End Stock Price | Year End Shares Owned | New Balance |
| 1 | $52.00 | 1,500.00 | $3.48 | $5,220.00 | $54.60 | 1,705.00 | $93,093.00 |
| 2 | $54.60 | 1,705.00 | $3.69 | $6,291.45 | $57.33 | 1,919.00 | $110,016.27 |
| 3 | $57.33 | 1,919.00 | $3.91 | $7,503.29 | $60.20 | 2,143.00 | $129,008.60 |
| 4 | $60.20 | 2,143.00 | $4.14 | $8,872.02 | $63.21 | 2,378.00 | $150,313.38 |
| 5 | $63.21 | 2,378.00 | $4.39 | $14,390.42 | $66.37 | 2,685.00 | $178,203.45 |
| 6 | $66.37 | 2,685.00 | $4.66 | $12,512.10 | $69.68 | 2,951.00 | $205,625.68 |
| 7 | $69.68 | 2,951.00 | $4.94 | $14,577.94 | $73.17 | 3,232.00 | $236,485.44 |
| 8 | $73.17 | 3,232.00 | $5.23 | $16,903.36 | $76.83 | 3,530.00 | $271,209.90 |
| 9 | $76.83 | 3,530.00 | $5.55 | $19,591.50 | $80.67 | 3,847.00 | $310,337.49 |
| 10 | $80.67 | 3,847.00 | $5.88 | $22,620.36 | $84.70 | 4,185.00 | $354,469.50 |
| 11 | $84.70 | 4,185.00 | $6.23 | $26,072.55 | $88.94 | 4,546.00 | $404,321.24 |
| 12 | $88.94 | 4,546.00 | $6.61 | $30,049.06 | $93.38 | 4,932.00 | $460,550.16 |
| 13 | $93.38 | 4,932.00 | $7.00 | $34,524.00 | $98.05 | 5,345.00 | $524,077.25 |
| 14 | $98.05 | 5,345.00 | $7.42 | $39,659.90 | $102.96 | 5,788.00 | $595,932.48 |
| 15 | $102.96 | 5,788.00 | $7.87 | $45,551.56 | $108.10 | 6,265.00 | $677,246.50 |
| 16 | $108.10 | 6,265.00 | $8.34 | $52,250.10 | $113.51 | 6,778.00 | $769,370.78 |
| 17 | $113.51 | 6,778.00 | $8.84 | $59,917.52 | $119.18 | 7,331.00 | $873,708.58 |
| 18 | $119.18 | 7,331.00 | $9.37 | $68,691.47 | $125.14 | 7,928.00 | $992,109.92 |
| 19 | $125.14 | 7,928.00 | $9.93 | $78,725.04 | $131.40 | 8,573.00 | $1,126,492.20 |
| 20 | $131.40 | 8,573.00 | $10.53 | $90,273.69 | $137.97 | 9,271.00 | $1,279,119.87 |
And there you have it. Invest often, and you could retire a millionaire in just 20 years!
