Times are changing, and so are the retirement needs of people. Today, running a home on one person’s salary is difficult. You don’t know how the economy will be 30 years from now. If you are in your mid-30s and Canada Pension Plan (CPP) is all you have in the name of retirement planning, it is time to start before it is too late.
How to boost your CPP?
The Canada Revenue Agency (CRA) started the CPP enhancement plan in 2019 to give you 33% of your average pre-retirement salary as a pension. And this 33% is if you are eligible for the maximum CPP payout. That won’t be possible. You need to make a maximum CPP contribution for 40 years to get a maximum CPP payout. And you have already made six to eight years of base CPP contributions. You cannot change the past, but you can improve your future.
In your mid-30s, you could probably be making a maximum CPP contribution ($3,754 for 2023). You may have room to make more contributions after paying for your daily expenses and other short-term investments. So how about contributing another $3,700 towards Tax-Free Savings Account (TFSA) passive income? That’s just $312 per month.
With 30 years in your hand, you can have a sizeable retirement pool to boost your CPP.
To do some basic math, if you invest $3,700/year for the next 30 years, you would have invested $111,000. If you earn an average return of 9%, your $111,000 could become roughly $545,000 in 30 years. Considering a 5% yield on this, $545,000 could earn you $27,250/year in TFSA passive income. And as this is a TFSA withdrawal, this income will not add to your taxable income.
How to build a half-a-million TFSA retirement pool?
To build a TFSA retirement pool of over half-a-million with a $300 monthly investment, you can invest in some growth stocks that give a 20-30% annual return. Descartes Systems and Constellation Software are a few growth stocks that generate a 20% average annual return. But invest when they trade near their 52-week low to more than double your money in five years.
Don’t forget to diversify your portfolio. Instead of going all-in in growth stocks, create a comfortable asset allocation ratio; maybe 40-50% in growth stocks, 30-40% in dividend stocks, and a small portion of 8-10% for high-risk growth and dividend stocks.
For instance, say you invested $5,000 each in Descartes and Constellation Software, and it doubled your investment to $20,000 in five years. You can rebalance this portfolio by selling a few growth stocks and investing in dividend stocks to maintain your asset balance.
Two dividend stocks to build TFSA passive income
You can consider investing in Enbridge (TSX:ENB) stock, a favourite of dividend lovers. Its 67-year dividend-paying consistency makes it the first choice for retirement stocks. Enbridge’s business model is to earn toll money for its oil and gas pipelines and give 60-70% of its distributable cash flow (DCF) as dividends. The remaining 30% DCF gives Enbridge room to build a reserve for the difficult times when the payout exceeds 80% of DCF. It can use these reserves to continue paying and growing dividends.
Enbridge has accelerated its capital spending on gas pipelines to tap North American liquefied natural gas exports to Europe. Thus, it has slowed its dividend growth rate to 3% from 10% before the pandemic. Once these gas pipelines become operational, it might accelerate its dividend growth.
CT REIT (TSX:CRT.UN) is a good option to diversify your passive income source in other uncorrelated sectors. It is the REIT created by retailer Canadian Tire to develop and manage its stores nationwide. As the parent is the tenant, rental income keeps flowing and occupancy remains above 91%.
Currently, property prices are weak as high-interest rates make mortgages costly. Thus, the stock price of all REITs has dipped. Now is a good time for long-term investors to buy fundamentally strong REITs and lock in a 6% yield. CT REIT is among the few REITs that have been growing its dividend regularly, currently at 3.2%.
