The Motley Fool

Canada Revenue Agency: Are You Financially Ready to Retire?

Image source: Getty Images

The Canada Revenue Agency isn’t going to stop collecting income taxes from you when you retire. As long as you earn income, you will be taxed more or less.

Canada Revenue Agency: What has no income tax?

Your RRSP/RRIF withdrawals, CPP pension payments, and OAS payments are all taxable income. GIS payments are not taxable. Your TFSA withdrawals are also not taxable.

Some retirees who started making minimum withdrawals from their RRIFs but don’t need to spend the entire amount can put the excess in their TFSA for tax-free growth.

Are you financially ready to retire?

A lot of people used to aim for $1,000,000 as the magic number for retirement. They think that once they become a millionaire, they will have enough to spend for the rest of their lives. As I’ll show below, you might not even need this much to retire.

In any case, life expectancy is as long as ever. So, you could easily have 10-30 years or longer of retirement life to enjoy. You don’t want to run out of money in that duration!

The most conservative way to ensure you have enough money to spend for the rest of your life is to continue growing your assets and generate sufficient income from your assets to spend on. Ideally, your assets should generate enough income to cover all your expenses.

Some expenses in retirement could include property tax, home insurance, home maintenance, rent, gas, hydro, electricity, groceries, phone, internet, entertainment, subscriptions, travelling, healthcare, gifts, donations, etc.

After adding up the expenses that you expect to incur in a year, divide the number by 12 to determine your average monthly expenses. If you can cover that amount with the income (ideally with a buffer) from your assets, you can consider retiring.

Where to get juicy income today

Retirees or soon-to-be retirees want to preserve their hard-earned savings while generating ample income for their spending needs. Right now, interest rates are too low. The best five-year GIC rate is 2%.

Capital preservation? Check. Ample income generation? Nuh-uh.

As a result of low interest rates, retirees are forced to seek greater income from the stock market. Thankfully, there’s an abundance of safe dividend stocks that offer yields of 5% or greater. For example, you can explore Enbridge, Bank of Nova Scotia, TELUS, H&R REIT, and Capital Power to see if they’re good fits for your portfolio. Currently, they offer yields of 8.3%, 5.8%, 5%, 5.1%, and 6.5%, respectively. Importantly, these stocks are either fairly valued or discounted.

If you have an investment horizon of at least five years for these investments, you’re likely to experience price appreciation while collecting some very nice income for spending.

On a $1,000,000 equal-weight portfolio, one would invest $200,000 in each stock and earn a portfolio yield of 6.1% for $61,000 of annual income. These names pay out eligible dividends that are favourably taxed for Canadians. But, of course, if you have room in your TFSA, you should invest there for tax-free income and growth.

Let’s not forget you’re probably getting CPP or OAS payments as well. So, $61,000 of passive income a year may be more than you need.

The Foolish takeaway

You don’t necessarily need $1,000,000 to retire. Everyone’s income needs are different. How much you need depends on the kind of retirement lifestyle you want.

After you estimate your annual expenses, you might be surprised by how much you’re spending per month. In any case, the stock market is offering some very special income opportunities. And that’s certainly worth exploring, as it can push ahead your retirement date!

Speaking of generating big and safe income...

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

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 Kay Ng owns shares of CAPITAL POWER CORPORATION, Enbridge, H&R REAL ESTATE INV TRUST, and The Bank of Nova Scotia. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends BANK OF NOVA SCOTIA.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.