We’re now more than halfway through February, and Canadians only have a few weeks to make their annual RSP contributions and receive the tax benefit for 2016. The RSP deadline is Wednesday, March 1.
Although many Canadians make this annual financial commitment, a number of them either have no idea why, nor do they have an end goal in mind. Although every individual will have a different finish line, the important thing to remember is, there are many ways to get there. For investors who have decided $1 million is a good goal, the amount is surprisingly attainable over a person’s working life.
For a working person, an annual contribution of $7,500 compounding at a rate of just 5% can easily do the trick. Let’s discuss a 30-year-old with no savings to speak of but has a good salary. Assuming the annual contributions are made every single year, the $1 million mark will be attained in just under 42 years — a little longer than most would want. If that investor were willing to take on a little more risk, however, the opportunity to reach one’s goal and potentially retire before the age of 72 is possible.
Assuming a 7.5% rate of return, the $1 million mark would be attained in a little over 33 years. The beauty of higher returns is that the total number of $7,500 contributions is only 33, instead of 42 annual contributions.
Higher returns can work wonders. Let’s say we have a more aggressive investor; a 10% rate of return would translate to less than 28 years of contributions and compounding to reach the mark. Even better, if an investor seeking 10% returns were to work for the 33 years instead of 28, then the total amount would grow to almost $1.67 million.
Finding securities that can deliver a reasonable 10% return to investors is not as hard as you think. A defensive company called North West Company Inc. (TSX:NWC) operates general stores predominately in northern Canada and Alaska. The company is currently offering a dividend yield of almost 4.25% and has compounded very nicely over the past five years.
The total price return over the past five years has been a little more than 50% in total, translating to a compounded annual growth rate in excess of 10.5%. Adding the dividend into the price appreciation, investors have enjoyed an annual return of approximately 15%. That’s not bad for a defensive business which sells groceries in remote communities.
Investors should adopt the expression “good things come in boring packages.” As one of the most un-sexy businesses out there, the grocery retail business has the potential to offer investors returns that, over time, exceed the averages, making investors very wealthy in the process.
