The Motley Fool

How to Retire Early

When should you retire?

The question is more common today than it might have been in the past. People are living longer, and that is resulting in governments trying to persuade their citizens to continue working later in life. Retiring at 65 used to be the top end of the working age, with many people exiting the workforce at 60, depending on their financial situation and their company pension plan.

Employees who love their jobs might be happy to work until they are 70, or later. For those of us who would prefer to spend our time on other pursuits, punching the clock for the last time in our fifties would be ideal.

Retiring early requires careful financial planning due to the way company pensions and CPP are paid out. Defined-benefit pensions that have a target retirement date of 65, for example, might allow you to retire earlier, but the payout drops. Taking CPP at 60 instead of 65 will also result in a significant cut.

The trick to retiring early is to have enough income coming from other investments to get you to 65 when you can tap the full value of CPP, the company pension, and OAS.

One way to do this is to start drawing down your RRSP early. The reason for this is that RRSP withdrawals are taxed, so you want to be in the lowest possible tax bracket when you remove the funds.

How much money do you need?

Let’s say you will receive a total of $35,000 per year at age 65 from the government and company pensions and that is adequate to cover your living expenses. If you want to retire at 55, you would need enough RRSP savings to cover you for 10 years. This would mean the RRSP fund would need to be about $350,000, assuming you do not get any return on the savings.

One way to build the RRSP portfolio to meet that goal is to buy top-quality dividend stocks and invest the distributions in new shares. This sets off a compounding process that can turn reasonably small initial investments into a large nest egg. The best companies to buy tend to be market leaders with strong track records of revenue and earnings growth to support rising dividends.

Royal Bank of Canada (TSX:RY)(NYSE:RY) is a good example. The bank is Canada’s largest company with a market capitalization of more than $150 billion. Royal Bank generated $12.4 billion in profit in fiscal 2018 and expects earnings per share to grow 7-10% per year. Dividends should continue to rise at that pace. The current payout provides a yield of 3.9%.

The company is investing heavily in digital solutions to keep up with changes in the financial industry and should remain competitive.

A $30,000 investment in Royal Bank just 20 years ago would be worth more than $360,000 today with the dividends reinvested.

The bottom line

Early retirement might seem like a dream, but it can become reality with some careful planning. Royal Bank is just one name among a number of top Canadian stocks to choose from when building a self-directed RRSP portfolio.

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

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