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.
