How You Can Retire Early

Retiring early can be as simple as starting with your first dividend stock, such as National Bank of Canada (TSX:NA), which yields 5.6%. What else should you know?

Kay Ng

Author Bio Kay graduated from the University of British Columbia with a Bachelor of Science in Computer Science and furthered her studies in financial markets, finance, and financial accounting. She began investing in dividend stocks in 2008, turning an early interest into a lasting passion. Over the years, Kay has refined her investment approach to focus on high-quality businesses, using fundamental analysis and valuation to identify long-term investment opportunities. Her investment research and articles have been featured in The Motley Fool, Sure Dividend, and Seeking Alpha. Outside of investing, Kay enjoys playing the piano, from popular songs learned by ear to challenging classical compositions. Her favourites include Fantaisie-Impromptu by Frédéric Chopin and La Campanella by Franz Liszt. Education Bachelor of Science (BSc) in Computer Science, University of British Columbia Further studies in financial markets, finance, and financial accounting Areas of Expertise Dividend stocks, fundamental analysis, company valuation, quality investing, long-term investing, business fundamentals, and identifying investment opportunities in high-quality companies. Social Media Profiles LinkedIn Favorite Investment Quotes “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” — Benjamin Graham “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett

Published March 4, 2016 9:58 am EST

Just about everyone would like to retire early. You must either amass enough savings, or you have to develop other means to generate a passive income that you can live on.

Personally, I think having savings is not good enough. These savings should be earning something (excluding the three months to three years of cost of living savings that’s used for emergencies). Other than your emergency fund, the rest of your savings could be generating a passive income stream for you.

Here’s how you can retire early.

Spend less than you earn

Before you can save to buy assets that generate passive income, you first need to spend less than the amount you earn. Statistics Canada found that the median income earned by a Canadian in 2013 was $32,020. Applying a 3% inflation rate, we arrive at a median income of $34,990 this year.

Assuming you earn the median income, if you’re able to save $3,499 (or 10%) of that every year (equating to $292 a month), you’ll save $34,990 in 10 years. Once you make a habit of spending less than you earn, it should be very easy to save.

If you’re able to earn a 5% rate of return for the $3,499 you save every year, you’d amass $46,210, which is $11,220, (or 32%) more than if you just hid the money under the carpet.

Build a passive income stream

The more you save and the higher the rate of return, the larger the amount of savings you will amass.

Let’s say we stick with the 5% return. Where can we get that today?

You’ll be thrilled to know that some dividend stocks offer that 5% return from dividends alone. That’s right! Without having to worry about where the stock price might go, you can get dividend cheques paid to you regularly.

At $38.7, National Bank of Canada (TSX: NA) yields 5.6%, which is higher than the 5% we wanted. Its payout ratio is about 46%, so its dividend is sustainable.

Brookfield Infrastructure Partners L.P. (TSX: BIP.UN)(NYSE: BIP) is a diversified utility with quality assets that generate stable cash flows to support its distribution. Its annual payout is US$2.28 per unit (equating to US$0.57 per quarter). Using a foreign exchange of US$1 to CAD$1.25, it yields 5.7% at $50.1 per unit. Its payout ratio is sustainable around 70%.

Brookfield Infrastructure pays distributions that can consist of interest income, foreign-sourced dividends, locally sourced dividends, eligible and qualified dividends, and capital gains. So, it’s better to hold it in an RRSP or TFSA instead of in a non-registered account.

The last BIP distribution I received in my TFSA had a negligible amount (15%) withheld because a teeny weeny portion of the distribution was U.S. dividends.

These two companies are a good start in building a passive income stream. Once your diversified passive income stream is bigger than your job’s income, you can retire.

Conclusion

It’s never too early to start saving and investing for retirement. Keep in mind to spend less than what you earn and use those savings to build a passive income stream.