Are you a Canadian who wants to be wealthy and comfortable in retirement?
If so, you have your work cut out for you. It will take a lot of effort and planning to retire wealthy. But your goal can be attained. Over the years, the world’s top wealth managers and financial experts have offered many tips and tricks to help people retire wealthy. Some of these wealth-building strategies are out of reach to the average Canadian, but others are surprisingly doable. In this article, I will explore three of the top wealth-building tips for Canadian retirees, based on the writings of top experts like Ray Dalio, John Bogle, and Paul Tudor Jones.
Key #1: Tax efficiency
One of the keys to retiring wealthy is tax efficiency. You may have heard about how billionaires use all kinds of tricks to lower their tax bills. Some of these, like moving money overseas, aren’t available to you — at least not easily. But two are: RRSPs and TFSAs.
RRSPs are tax-deferred accounts that give you a tax break when you contribute to them. They also let your money compound tax-free for the duration of the period that they are in the account. They become taxable when you go to withdraw the money, but if you wait until retirement, you should have a lower tax rate at the time of withdrawal.
TFSAs are similar to RRSPs, except that there is no tax break on contribution, and you can withdraw funds from them tax free. Like with RRSPs, investments are tax free when held in TFSAs. Unlike with RRSPs, they do not become taxable on withdrawal.
Key #2: Regular investments
The second key a wealthy retirement is to regularly contribute to your accounts. In investing, you don’t want to just invest in one lump sum and call it a day. What you want to do instead is “dollar-cost average” — that is, buy regularly at predictable intervals. By doing this, you grow your account over time. You will also periodically get in buys at the low market levels that tend to produce superior returns.
Key #3: Responsible investments
A third and final key to a wealthy retirement is to invest responsibly. While you might have an itch to invest in high-flying growth stocks you’ve heard about, it pays to invest more conservatively. Individual stocks sometimes produce outsized gains, but they can also lead to catastrophic losses. You could consider a “core and satellite portfolio” strategy in which you invest 90% of your money in low-risk assets and 10% in high-risk plays. But in general, you want to invest the bulk of your money in index funds. Such funds offer diversification, which reduces risk, and typically have low fees, which reduces the amount of money you lose to fund managers.
Consider iShares S&P/TSX Capped Composite Index Fund (TSX: XIC), for example. It’s an ultra-diversified fund, with 240 stocks. Its management expense ratio is a mere 0.06%, which means that you don’t pay out a huge percentage of your returns to the fund’s managers. Finally, it has a relatively high dividend yield (2.5%), which provides cash income, and a buffer against stock market volatility. With funds like XIC, you face much lower risk than you do with individual stocks. So, investing in them consistently is a great way to secure a wealthy retirement.
