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It can seem impossible. How on the good face of this green earth are you going to replace all the money you make every single month? If you’re making around $60,000 per year, that means each month you’re bringing in $5,000. That’s a lot of passive income you need to create and replace.
So, let’s get into how to create that retirement paycheque, starting small and making it big.
Do what you can
First off, if you’re looking to create a retirement pay cheque, you’ll want to start as early as possible. For instance, I’m in my 30s, but I’ve been saving for retirement since I was 18. In this case, you could invest as much as $300 per month. Over time, that adds up to $3,600 per year. Then, let’s say I plan to retire at 65. If I’ve been doing this religiously since 18, that means I’ll have $169,200 by the time I retire.
However, that certainly isn’t going to give me $5,000 per year — especially if I live for another 30 years, let’s say. In fact, that just would give me $5,640 per year in that case. This is why the next step certainly has to include investing.
Find safe investments
This is where investors should look to their financial advisor for, well, advice! If you can only afford to put aside $3,600 per year, then that’s what you can afford. Investors should create a diversified set of assets, from Guaranteed Investment Certificates (GIC) and bonds to equities and funds. But for the sake of this example, we’re going to look at investing in a long-term strategy of one of the best stocks out there.
For this you’re going to want stable dividends, stable growth, and just an overall stable business. I would, therefore, look at Royal Bank of Canada (TSX:RY) in this case. Let’s get into why and what you could create with that $3,600.
Putting it to work
I would certainly look to Royal Bank stock for many reasons. First off, it’s the most valued company in the country, with a market cap of $185.57 billion as of writing. That’s growing even more as well, considering the company recently acquired HSBC Canada.
Meanwhile, the company has held the top spot for years, and it doesn’t look like that will change any time soon with this acquisition. In the last two decades alone, shares have grown by 323%. That’s a compound annual growth rate (CAGR) of 12%!
With a dividend yield of 4.18%, you can bring in dividends of $5.52 each year as well. Add this in and reinvest, and you can create even more cash flow. And again, it offers a CAGR of 8.96% for dividend growth in 20 years.
Bottom line
Let’s say you now invest that much over the next 20 years. That would mean you’re about where I am right now. Here is how much that could make by reinvesting in dividends during that time and $3,600 annually.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Year End Stock Price | New Balance |
| 1 | $131.00 | 27.00 | $5.52 | $149.04 | $3,686.04 | $146.72 | $7,776.16 |
| 2 | $146.72 | 53.00 | $6.02 | $319.06 | $8,095.22 | $164.33 | $12,653.41 |
| 3 | $164.33 | 77.00 | $6.56 | $505.12 | $13,158.53 | $184.05 | $18,220.95 |
| 4 | $184.05 | 99.00 | $7.15 | $707.85 | $18,928.80 | $206.14 | $24,736.80 |
| 5 | $206.14 | 120.00 | $7.79 | $934.80 | $25,671.60 | $230.88 | $32,323.20 |
| 6 | $230.88 | 140.00 | $8.49 | $1,188.60 | $33,511.80 | $258.89 | $40,904.62 |
| 7 | $258.89 | 158.00 | $9.25 | $1,461.50 | $42,366.12 | $289.96 | $50,743.00 |
| 8 | $289.96 | 175.00 | $10.09 | $1,765.75 | $52,508.75 | $324.73 | $62,348.16 |
| 9 | $324.73 | 192.00 | $11.00 | $2,112.00 | $64,460.16 | $363.70 | $75,649.60 |
| 10 | $363.70 | 208.00 | $11.99 | $2,493.92 | $78,143.52 | $407.34 | $90,836.82 |
| 11 | $407.34 | 223.00 | $13.07 | $2,914.61 | $93,751.43 | $456.22 | $108,124.14 |
| 12 | $456.22 | 237.00 | $14.25 | $3,377.25 | $111,501.39 | $519.07 | $129,767.50 |
| 13 | $519.07 | 250.00 | $15.53 | $3,882.50 | $133,650.00 | $581.35 | $152,895.05 |
| 14 | $581.35 | 263.00 | $16.93 | $4,452.59 | $157,347.64 | $651.11 | $179,055.25 |
| 15 | $651.11 | 275.00 | $18.45 | $5,073.75 | $184,129.00 | $729.94 | $209,492.78 |
| 16 | $729.94 | 287.00 | $20.00 | $5,740.00 | $215,232.78 | $817.53 | $243,623.94 |
| 17 | $817.53 | 298.00 | $21.80 | $6,496.40 | $250,120.34 | $915.63 | $282,929.67 |
| 18 | $915.63 | 309.00 | $23.76 | $7,341.84 | $290,271.51 | $1,025.51 | $328,163.20 |
| 19 | $1,025.51 | 320.00 | $25.90 | $8,288.00 | $336,451.20 | $1,148.57 | $379,028.10 |
| 20 | $1,148.57 | 330.00 | $28.23 | $9,316.23 | $388,344.33 | $1,286.40 | $437,376.00 |
You now have $437,376 in 20 years, almost four times what you would have through saving alone all the way until retirement! That alone would bring in monthly income of $1,214.93.
