MENU

Millennials: Here’s How Your RRSP and Dividend-Growth Stocks Can Help You Build Retirement Wealth

Planning for retirement is more complicated these days than it was 20 years ago.

In the past, young Canadian graduates could reasonably expect to find full-time work with decent pension benefits. If you had a college or university degree, companies were willing to give you a shot and foot the bill for training.

Today, finding an internship or contract work is difficult enough, let alone a full-time job.

And a defined-benefit pension? You pretty much have to be a government employee to get that kind of perk any more.

To top it off, an entry-level job two decades ago paid about the same as it does today, but that house your parents bought for $100,000 a few years after they graduated will now set you back $500,000 or more.

So, relying on a company pension or even a huge appreciation in the value of a home is pretty much off the table for retirement planning.

As a result, millennials are forced to take things into their own hands when it comes to setting aside some cash for the golden years. One way to do it is through a Registered Retirement Savings Plan (RRSP).

RRSP vs TFSA

The RRSP is taking a bit of a back seat to the newer TFSA, but for many people, putting cash in an RRSP is still the better way to go for retirement planning.

First, the RRSP is designed specifically for putting money away for retirement, while the TFSA is a general-purpose savings tool. For people who have a tough time leaving savings alone, the penalties attached to pulling cash out of the RRSP can be a source of forced discipline.

The RRSP contributions also reduce your taxable income, while the TFSA contributions are made with after-tax savings.

Depending on a person’s tax bracket, putting the cash in the RRSP can be more attractive. Why give the government your money now if you can put off the payment for 30 or 40 years?

With a bit of planning, you should be in a lower tax bracket when you finally need the funds. If your tax bracket turns out to be higher in retirement, you have done a few things right along the way.

Which stocks should you buy?

The best companies are industry leaders with strong track records of dividend growth.

Dividend stocks are key because you want to reinvest the distributions in new shares. This sets off a compounding process that can turn a modest initial investment into a substantial nest egg over time.

Let’s take a look at Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to see why it looks like a good pick.

TD is widely regarded as the most conservative bank among Canada’s top financial companies. The reason lies in the fact that TD gets most of its revenue from bread-and-butter retail banking.

This includes all the products and services people get from the branches, such as credit cards, mortgages, and lines of credit. Investment fees and account charges also fall under that umbrella.

TD generates 61% of its net income from the retail operations in Canada, but it also has a growing U.S. business that accounts for an additional 25% of earnings. The presence south of the border is attractive because it provides a hedge against tough times in Canada and gives investors an opportunity to benefit from the strong American dollar.

The company has a track record of dividend payments that goes back more than 150 years. The current payout yields 3.9%.

The returns?

A single $10,000 investment in TD just 20 years ago would now be worth $182,000 with the dividends reinvested.

There’s no guarantee the same investment today will grow equally over the next two decades, but the example shows there is still an opportunity for millennials to save some serious cash for retirement.

Stock buy alert hits astounding 96% success rate!

The hand-picked investing team inside Stock Advisor Canada recently issued a buy alert for one special type of "bread-and-butter" stock where The Motley Fool U.S. has banked profits on 23 out of 24 recommendations. Frankly, with an astounding 96% success rate that has delivered average returns of 260%, chances are this new pick could deliver life-changing returns as well. Because the team at Stock Advisor Canada fully embraces the same time-tested investing philosophies that have led to countless Motley Fool winners globally. So simply click here to unlock the full details behind this new recommendation and join Stock Advisor Canada.

*96% accuracy includes restaurant stock recommendations from Motley Fool U.S. services Stock Advisor, Rule Breakers, Hidden Gems, Income Investor and Inside Value since each services inception. Returns as of 5/27/16.

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

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to find out how you can claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.