The last three years have taught investors how concentration risk can wipe out 60–80% of their investment earnings. Times like these remind you that your retirement plan needs to mitigate the risk of a macroeconomic event and give you a buffer to delay your retirement by a year or two. Like the Canadian banking system, you can grow your retirement portfolio while managing market, liquidity, and credit risk. Here are three ways to go about your retirement investing.
Make the most of registered savings accounts
Registered savings accounts like the Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) help you grow investments tax-free. What does it mean from an income and a tax perspective?
For instance, Joe purchased stocks worth $6,000 in 2013 and sold them for $18,000 in 2023, earning $12,000 in investment income. Joe has to pay capital gains tax (CGT), whereby he has to add 50% of the gain ($6,000) to his taxable income. Joe falls under the 26% tax bracket, reducing his investment income by $1,560 ($6,000 x 26%).
| Year | Investment | Investment Return @ 10% | Total Amount |
| 2023 | $1,560 | $156.0 | $1,716.0 |
| 2024 | $171.60 | $1,887.6 | |
| 2025 | $188.76 | $2,076.4 | |
| 2026 | $207.64 | $2,284.0 | |
| 2027 | $228.40 | $2,512.4 | |
| 2028 | $251.24 | $2,763.6 | |
| 2029 | $276.36 | $3,040.0 | |
| 2030 | $304.00 | $3,344.0 | |
| 2031 | $334.40 | $3,678.4 | |
| 2032 | $367.84 | $4,046.2 |
If Joe had invested this $6,000 in an RRSP, he would have saved the $1,560 tax bill, as your investment income is not taxed until withdrawn from the account. Further, if he reinvests the $1,560 tax saving in a stock that earns a compounded annual return of 10%, the amount could grow to $4,046 in 10 years.
Investing through a registered account instead of a normal account earned Joe an extra $4,000.
Invest regularly and book timely profit even in a retirement portfolio
Once you have opened a TFSA and RRSP, you can start investing. The TFSA and RRSP have a 2023 contribution limit of $6,500 and $30,780, respectively. Instead of investing a significant amount in one go, invest $500/month in a TFSA and $1,000–$2,000/month in an RRSP.
Investing a small amount monthly will not impact your budget and prevent you from delaying investment to the last minute. Moreover, regular investing will help you make the most of market volatility and reduce your average cost.
When you invest, keep checking your portfolio and book timely profits in a bullish market.
Diversify your retirement portfolio across income and growth stocks
You can invest in high-dividend stocks like BCE (TSX: BCE) through your TFSA and withdraw dividends tax-free. The telecom operator has an average dividend yield of 5.5% and been paying dividends for over 50 years. BCE grew its dividend at a compounded annual growth rate of 5% in the last 13 years.
A $500 monthly investment in BCE for two years can buy you 193 shares at an average price of $62. If the company grows its dividend by 5% for the next 10 years, the annual dividend per share could grow to $5.99 by 2032, earning you a dividend income of $1,156 on 193 shares. It is possible, as your dividend income is tax-free in the TFSA.
But concentrating your retirement portfolio on a single stock exposes your investment to market risk. Diversify your stock portfolio across sectors and asset classes, like mutual funds, ETFs, REITs, bonds, and bank deposits. Have your retirement accounts in different banks to diversify the financial institution’s credit risk.
Having four to five dividend aristocrats from different sectors can diversify your market risk and give you some liquidity even in an economic crisis. For your RRSP investment, you can invest in top stocks of the month. That will help you buy stocks at a good price and diversify across market-cap and sectors.
Final takeaway
While investing for retirement, maintain a cash reserve of 6 to 12 months of your monthly expenses for contingencies. This cash cushio will protect you from selling your stocks at a loss in a bearish market and give you a buffer to delay your retirement to a time when the economy is strong.
