Early last week, I’d discussed why it is more important than ever to utilize your RRSP room. Retirement is coming into focus for more and more Canadians as the population ages, but an entirely new generation is contending with an environment that will require more rigorous saving, investing, and planning.
In some cases, ironing out a concrete number may not be the best strategy. Instead, investors should build a retirement plan refined to their own situation. This will allow for you to construct a realistic and attainable goal.
Sun Life (TSX:SLF)(NYSE:SLF) is a Toronto-based company that provides insurance, retirement, and wealth management products. Sun Life has been a strong stock for long-term holders. Shares have climbed over 120% over the past decade. To add to that, Sun Life offers a quarterly dividend of $0.5 per share. This represents a solid 3.8% yield.
Like many financial institutions, Sun Life has a retirement savings calculator for its customers to use. Today, we are going to use data from the 2016 Canadian Income Survey to throw up a sample retirement plan.
Canadian families and unattached individuals had a median after-tax income of $57,000 in 2016. We will roll with this number for our example today. In our example, our investor will be 30 years of age and will have not yet invested a dime for their retirement. Fortunately, as the tool will show, this is not a reason to panic.
We will assume that our 30-year-old investor wants to retire at 65 years of age. Going by current trends, this may be optimistic, but we will go with the traditional outlook. Most retirement planners will recommend that those saving up for retirement plan to use 40-70% of their income when leaving the workforce in retirement. Using our original $57,000 income, we will aim for the higher end, which puts us at an annual retirement income of approximately $40,000.
Our imaginary 30-year-old investor does not have a defined-benefit pension plan. They have no other sources of retirement income. Our young investor is somewhat aggressive and is gunning for an assumed rate of return of 5%.
After punching in those numbers, that puts our retirement savings goal at just under $1.3 million for our hypothetical 30-year-old investor. The plan calls for $835 per month to be committed to their RRSP. This will put them on track for their savings goal. Remember that this rough plan assumes that our 30-year-old investor will not see their annual income grow over their career, which would be a pessimistic outlook. We were also gunning for the higher end of our rough retirement goal. Those just starting out should set attainable goals and up their contributions when they are comfortable doing so.
For reference, with $10,000 invested in a stock like Sun Life 10 years ago would have allowed you to more than double your original investment. And that is just from capital gains, never mind the consistent quarterly dividends payouts.
The best way for new investors to meet their retirement goals is to establish an automatic savings plan that ensures a percentage of your weekly, bi-weekly, or monthly income is going into a registered account. And remember, it is never too late to start saving for retirement.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.