Are you hoping to retire and live off passive income?
If so, you have a worthy goal. However, it will take some work to reach it. The average Canadian believes that they will need $756,000 to retire. Polls of professional financial advisers yield similar numbers. It takes some time to save that much money, but it can be done.
In this article, I will explore how much passive investment income you will need to retire comfortably.
For most Canadians, $24,000 (not including CPP)
Based on the “$756,000” number offered above, and a few calculations, we can say that $24,000 per year should be enough for a person to retire on in 2023. There are a few ways of approaching this.
- The TSX stock market currently has a 3% dividend yield. A 3% yield on a $756,000 portfolio comes out to approximately $23,000 in annual passive income. That’s very close to $24,000.
- Average rent nation-wide is $2,000 per month. If you have a $24,000 passive-income stream in a tax-free environment like a TFSA, you can cover rent with your investments. CPP, or the Canada Pension Plan, pays $811 per month on average, and OAS, or Old Age Security, pays about $691 (if not clawed back). Let’s say your CPP and OAS after tax amount is $1,200. That’s enough to spend $500 on groceries, pay a $400 utility bill, and spend $300 on telecommunications plus some discretionary spending.
So, if you’re getting $24,000 a year from investments, you should be able to cover all of your expenses with dividends — CPP and OAS combined. This assumes, of course, that your entire portfolio is tax sheltered: in reality, it’s hard (but not impossible) to have a TFSA with a $756,000 balance. If you want to play it safe, you might want to aim for $30,000 per year rather than $24,000 per year, though the latter figure should work if you keep your expenses low.
How you could get that much passive income
If you want to earn $24,000 per year in dividend income but don’t have $756,000 saved, you could explore opportunities in high dividend stocks. With stocks that have higher-than-average yields, you can get more income with less savings. There are risks with this strategy of course: higher returns usually mean higher risk. But an adequately diversified, high-yield portfolio might be the right strategy for some people.
To illustrate the power of high-yield investing, we can look at Enbridge (TSX:ENB) stock. It’s a very high-yield stock with a 6.63% dividend yield. If you invest $100,000 into ENB stock, you get $6,630 back in passive income each year. It follows from this that you only need to invest $361,990 into ENB stock to get $24,000 in annual passive income.
Is it a good idea to invest in Enbridge?
Well, you shouldn’t invest all of your money into it. You need to diversify somewhat to reduce your risk. Most likely, a diversified portfolio with 25 stocks that have similar yields to ENB would be less risky than ENB. Nevertheless, Enbridge is a great Canadian company with few competitors that transports a massive percentage of the oil and natural gas that moves across North America. It probably wouldn’t hurt to have a little exposure to it in your portfolio.
