Forget about retiring in luxury if you intend on just using your CPP payments to finance your lifestyle. The average monthly CPP pension payment amount is less than $700, which is less than the average rent in some Canadian cities.
And if you plan on spending your savings as well, you run the risk of running out of money if you lack an alternative income stream that can help supplement your CPP payments.
Sure, you could delay retirement further to receive more generous CPP payments in the future, but depending on your situation, it may not be worthwhile or even practical to do so.
Fortunately, there’s a better way for retirees to retire comfortably without having a fear of running out of money.
As someone wise once said: “Never spend the principal, just the interest.” Or in the case of dividend-paying stocks, “Just spend the dividend payments.”
Unless your grandchildren are willing to help finance your lifestyle in retirement, you’re going to need to treat your CPP as a mere supplement and not as a primary source of income.
Combine your CPP and an optimized TFSA income fund, though, and you’ll not only be capable of sustainably financing the retirement lifestyle of your dreams, but you’ll also continue to grow your wealth and have a tonne of wealth to pass down when the time comes.
Consider stocks like Fortis (TSX:FTS)(NYSE:FTS) and real estate investment trusts (REITs) like SmartCentres REIT (TSX:SRU.UN), with their yields of 3.6% and 5.8%, respectively.
Fortis
Fortis currently has a much lower yield than what you could get with many other dividend-paying securities out there.
What makes the compromise worthwhile for retirees is the magnitude of stability you’re getting (heavily regulated operations) and a guarantee (the closest thing to a guarantee you’ll find outside of the world of fixed-income, anyway) of mid-single-digit annual dividend growth.
In essence, Fortis is a bond proxy that’ll give you a raise every single year that goes beyond the rate of inflation. You’ll also benefit from capital appreciation over time should you decide to rotate your income fund towards higher-yielding names.
Many retirees could care less about capital gains and are more focused on the upfront yield. But with Fortis, you have the option to sell the name and rotate into higher-yielding securities at some point down the road should an unexpected event cause an increase to your monthly expenses.
High-quality yield is getting scarce. And Fortis, I believe, is still a top solution for those who no longer see options that make sense in the bond market.
SmartCentres REIT
Higher yield means a higher degree of risk, right?
You’re probably wondering why I’d recommend owning a retail REIT with all the e-commerce headwinds that have been plaguing the physical retailers of yesteryear. The shopping mall is dead, isn’t it?
SmartCentres REIT isn’t suffering from soaring vacancies as you may expect, mostly because it’s a REIT with reliable tenants that are not about to go belly up anytime soon.
Moreover, SmartCentres has a long-term plan to drive its AFFOs higher through mixed-use developments that will allow it to command higher rents as a result of the mutually beneficial relationship to be had between residential and retail tenants within such mixed-use properties.
While the higher 5.8% yield offered by SmartCentres may seem riskier, it doesn’t come at the expense of risk. REITs are required to distribute 90% of their taxable income to investors, so the trade-off for the higher yield isn’t risk, it’s growth.
It’s tough to grow as a REIT when you’re required to pay large distributions, but it’s not impossible, especially if you’re investing the remainder in development projects that give the best bang for the buck.
Foolish takeaway
A CPP on its own isn’t sufficient on its own.
With a TFSA income fund, including high-quality names like Fortis and SmartCentres REIT, to supplement your CPP, you’ll be able to retire in style and not have to worry about running out of retirement savings.
