The earlier you start planning for retirement, the better. Even if you are in your early 40s, you still have 20 years before retirement. At this stage, you cannot have the same retirement plan as someone in their 30s. While your Canada Pension Plan (CPP) contribution would pay 25-30% of your average salary on retirement, you should have at least 70% of your salary coming in during retirement. You can accelerate your retirement savings by increasing your investments and growing your average portfolio return.
How to increase your investments in your retirement pool?
The Tax-Free Savings Account (TFSA) helps you grow your investments tax-free. While you can contribute only $6,500 to your TFSA in 2023, you can increase your investment by reinvesting the dividend amount or selling some growth stocks and reinvesting the profit in other stocks.
For instance, say you receive a $250 dividend from your previous investments. Instead of withdrawing the dividend, you can reinvest it to buy another stock. This way, your 2023 TFSA investment increases to $6,750 ($6,500 + $250). Moreover, your dividend is not taxed, while the $6,500 contribution is.
How to increase your average portfolio return?
When it comes to retirement savings, only dividend stocks come to mind. But some resilient growth stocks can give you up to 20% average annual return, doubling your money in five years.
Growth stocks for TFSA retirement savings
Descartes Systems (TSX: DSG) is a good TFSA stock to buy and hold for five years. But buy the stock at or below $100/share in 2023. While the stock may have a few weak years in which its price grows only 5-10%, it makes up for it with accelerated growth.
Trade is dynamic. Events like Brexit, the pandemic, the Russia-Ukraine war, and the United States-China trade war complicate the global supply of goods and services. Descartes offers supply chain management solutions to all companies ranging from airlines to oil to e-commerce. Its solutions help companies tackle these trade complexities optimally with minimal loss.
The demand for Descartes’ solutions continues to grow annual revenue by mid-teen percentages. This revenue growth reflects in the stock price. If you invest $3,000 in Descartes stock when its price falls to $100, you can buy 30 shares. When this amount doubles to $6,000, you can halve your holdings (sell 15 DSG shares) and invest that $3,000 in a dividend stock that generates a 5-6% yield.
So you still hold 15 Descartes shares for its long-term growth and simultaneously build your passive income pool.
What makes me sure DSG stock will double? The stock has surged 132% in the last five years despite two crashes (one during the March 2020 pandemic and one during a tech stock sell-off in November 2021). The stock bounced back as its price fell because of market sentiments and not fundamentals.
Dividend stocks to compound your TFSA retirement savings
Why do I suggest investing your profits from growth stocks into dividend aristocrats? The stock price of dividend aristocrats is less volatile as the dividend payout is reflected in their stock price. Hence, you don’t see a 40-80% fluctuation in dividend stocks other than in one-off instances. For instance, the pandemic pulled Enbridge’s (TSX: ENB) stock price down 34%, although the company continued to pay and even grow its dividend per share. Those who purchased this stock in bulk at its pandemic low locked in a higher dividend yield.
Both Enbridge and Descartes react differently to an economic situation. 2020 was a perfect time to maximize profits as Descartes’ stock surged while Enbridge’s fell significantly.
If you invested $3,000 in Descartes in 2019, your money would have doubled by August 2020 due to the tech bubble. If you followed the strategy to book the $3,000 profit and invest in Enbridge in October 2020, when its price fell to $38, you could have locked in an 8% yield.
