Who doesn’t want at least $1 million in retirement? Here are some tips to increase your success rate.
Save early and regularly
The first step to get your retirement fund started is to make it a habit to save. Your savings rate matters. The more you save and the earlier you start saving, the better. The general rule of thumb is to save at least 20% of your monthly income. If bonus money comes your way, save at least 20% of that, too. The earlier you start saving, the more time you give your investments to grow — the longer, the better.
Target a high rate of return
While saving early and regularly is a good start, targeting a high return on your long-term investments is a good idea. Notably, the higher return likely means taking on greater volatility and risk. It also means potentially getting higher long-term returns in a diversified portfolio that might incorporate bond exchange-traded funds (ETFs) and stocks. Your shorter-term cash needs might come from high-interest savings accounts and laddered Guaranteed Investment Certificates.
To get more reliable long-term returns through economic cycles, you can consider investing in solid dividend stocks that provide decent yields. For example, Royal Bank of Canada (TSX:RY) is a good retirement stock. It has been more resilient than its peers, and it makes quality earnings from its diversified operations in personal and commercial banking, wealth management, capital markets, and more.
At $126.87 per share at writing, the Canadian banking leader offers a nice dividend yield of close to 4.3%. RBC stock pays out eligible dividends that are taxed at lower rates than interest income and your job’s income because of the dividend tax credit. So, Canadian investors can hold shares in their non-registered accounts, and the dividends would be taxed at a lower rate.
At this quotation, the stock appears to be fairly valued as the market is still waiting for an upcoming recession by 2024 that’s generally believed will be a soft landing. RBC stock’s payout ratio is estimated to be sustainable at about 52% of earnings this year.
In the past 10 fiscal years, RBC increased its adjusted earnings per share (EPS) by almost 8.5% per year. Let’s be more conservative and assume it grows its adjusted EPS by 6% per year going forward; long-term investors can get approximated total returns of 10.3%.
Use tax-advantaged accounts
Of course, if you have room in tax-advantaged accounts like the Tax-Free Savings Account, Registered Retirement Savings Plan, Registered Education Savings Plan, and the newest First-Time Homebuyer Savings Account, you should highly consider investing in these accounts for more tax savings. Taxes saved means more money in your pockets and in your retirement!
Investor takeaway
Save at least 20% of your paycheque. For money you don’t need for a long time, invest in long-term investments, like bond ETFs and stocks. Whenever appropriate, use tax-advantaged accounts to save more taxes.
Assuming you’re saving and investing $10,000 per year for a 10% rate of return in a no-tax environment, it would take your investment portfolio a little over 24 years to reach $1 million.
