Investors: This 1 RRSP Tip Could Help You Retire Early

If you hold dividend stocks like Fortis Inc (TSX:FTS)(NYSE:FTS) in your RRSP, this one rule could help you retire early

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Do you want to retire early with a big RRSP that can carry you through your golden years?

If so, you’ve got your work cut out for you.

Although RRSPs let you grow your investments tax-free, they become taxable when you start making withdrawals. If you cash out before age 71, your funds are withdrawn as defined by the formula 1/(90 – age). If you cash out at the maximum age of 71, they’re withdrawn at an increasing fixed percentage each year.

As RRSP holdings become taxable on withdrawal, you need to make sure that you have a large enough balance to sustain you through your retirement–net of taxes. The following is one strategy that can help you get there in good shape.

Reinvest dividends when you’re young but allow them to flow out as you approach retirement age

Generally, RRSP investors tend to invest in dividend stocks. Retirement is all about income, after all, and when you’re 80, you can’t wait out the next downturn before your payday. So it’s almost a truism that RRSP holdings should be in income-producing investments.

However, that creates a conundrum:

Should you reinvest your dividends, or let them be paid out?

Theoretically, dividend reinvestment boosts total returns. And over a long enough time frame with good enough stocks, it works out in practice as well. However, dividend reinvestment temporarily reduces returns during bear markets: cash holds its value better than a falling stock.

So, what you want to do is reinvest your dividends while you’re young enough to wait out bear markets. When you approach retirement age, you can allow them to be paid out, which lets you maximize your returns when you’re young, and build up a “safety cash horde” as you approach retirement and start needing the money more.

If you start letting your dividends flow out at age 61, you can watch them accumulate until age 71, at which point you’ll have a large pile of cash that you can withdraw without selling stock.

The rule that incentivizes this strategy

The strategy of letting dividends flow out as you approach retirement is incentivized by RRSPs’ mandatory withdrawal policy. At age 71, you have to start withdrawing your funds, and if you don’t have enough to cash to cover them, you’ll have to sell stock.

When you come to that point, it helps to have a nice percentage of your holdings in cash, so you don’t need to sell out of too large a percentage of your portfolio.

A solid stock for this strategy

One solid stock for dividend reinvestment is Fortis Inc (TSX:FTS)(NYSE:FTS). As a utility company with an ultra-stable revenue stream, it’s likely to grow its dividends for the foreseeable future. This prediction is borne out by history: FTS has increased its payout every year for 46 consecutive years.

At current prices, the stock already yields 3.35%, which is pretty good, but with management aiming to increase the payout by 6% every year going forward, the ‘yield on cost’ could go much higher.

Utilities are great for dividend growth because they’re protected by high barriers to entry and extensive government regulations. In Fortis’ case, these advantages (among other factors) have resulted in a dividend growth rate of 7.3% annualized over the past five years.

Should you invest $1,000 in Fortis right now?

Before you buy stock in Fortis, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Fortis wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Andrew Button has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

A worker overlooks an oil refinery plant.
Dividend Stocks

3 High-Yield Canadian Stocks I’d Consider for a $5,000 Investment

These three dividend stocks are excellent additions to your portfolio, given their healthy cash flows and high yields.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How I’d Use My TFSA to Invest in Canadian Value Stocks for Long-Term Wealth

TFSA investors can mitigate bearish trends by shifting to value stocks that can deliver long-term wealth.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA ‘Forever Holdings’: 4 Canadian Stocks for Sustained Tax-Free Growth

Add these four TSX dividend stocks to your self-directed TFSA portfolio to generate tax-free passive income for decades.

Read more »

Beware of bad investing advice.
Dividend Stocks

Where I’D Invest $1,000 in 3 No-Brainer Canadian Stocks Under $150

Want to invest $1,000 in some great stocks? Here's a trio that investors can buy at a discount right now…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

The 1 Canadian Stock I’d Buy and Hold Forever in a TFSA

This Canadian stock is a strong option for any TFSA, and here's why.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

Invest $25,000 in These Dividend Stocks for $1,267 in Annual Passive Income

Dividend stocks are strong options, but these two could be some of the best long-term options.

Read more »

investor looks at volatility chart
Dividend Stocks

I’m Adding This 12% Dividend Stock for a Recession-Resistant Portfolio

Despite boasting such a high dividend yield, this 12% dividend yield stock might be an excellent pick to build your…

Read more »

Make a choice, path to success, sign
Dividend Stocks

1 Undervalued TSX Stock Down 51% to Buy and Hold

This TSX stock plunged, but don't count it out, especially at these prices.

Read more »