Individuals spend the majority of their lives working to save for retirement. But before you retire, you need to answer these three important questions.
1. How much will I earn post-retirement each month?
Canada has a couple of pension plans to help retirees earn monthly income. The maximum Canada Pension Plan (CPP) payment in 2023 stands at $1,30657, while the maximum Old Age Security (OAS) payment is about $691.
But it’s advisable to supplement your pension plans with other income streams such as dividend stocks or rental income. You basically need to determine how much you need to retire comfortably.
A general rule states that you can withdraw 4% of your savings each year, which means you will not run out of money for the next 30 years. So, if you have $1 million in total savings, you can withdraw $40,000 each year, indicating a payout of $3,333 each month.
2. What are my monthly living expenses?
Once you have calculated your monthly income, you need to determine your monthly expense. You need to create a retirement budget mapping out your expenses, such as housing, food, utilities, and leisure. Your monthly income should be enough to cover these expenses. If not, it’s advisable to delay retirement plans or lower expenses to avoid financial troubles.
3. How will I spend my days in retirement?
A major problem for retirees is boredom which may also lead to serious mental health issues. A report from the Institute of Economic Affairs in the U.S. states retirement may increase the likelihood of clinical depression by 40%, as retirees feel they are not doing anything meaningful anymore.
Retirees may consider taking on a hobby or getting involved in volunteer work to keep themselves busy.
Create a diversified portfolio for retirement
Future retirees need to create a diversified portfolio of dividend, growth, and blue-chip stocks, allowing them to accelerate retirement plans by a few years. Equities, as an asset class, have historically outpaced inflation, creating massive wealth for long-term shareholders. Moreover, dividend stocks such as Royal Bank of Canada (TSX:RY) can help you create a passive-income stream and supplement your pension plans.
RBC is the largest company on the TSX by market cap. Despite the cyclicality associated with the banking sector, the TSX heavyweight has increased dividends by 9.3% annually in the last 20 years, which is exceptional. It currently pays shareholders an annual dividend of $5.4 per share, indicating a dividend yield of 4.3%.
Priced at 10.5 times forward earnings, RBC stock trades at a cheap multiple and might surge over 10% in the next 12 months, given consensus price target estimates.
Alternatively, growth stocks such as CrowdStrike (NASDAQ:CRWD) can be held in a Tax-Free Savings Account, allowing you to turn a small sum into significant investments. CrowdStrike is one of the fastest-growing companies in the cybersecurity segment increasing its sales from US$481 million in fiscal 2020 to US$2.2 billion in fiscal 2023 (ended in January).
The exponential rise in the number of connected devices globally should act as a major tailwind for CrowdStrike in the upcoming decade. Its stellar top-line growth has also allowed CRWD stock to report consistent profits. For instance, Wall Street forecasts adjusted earnings to rise from US$1.54 per share in fiscal 2023 to US$3.08 per share in fiscal 2025.
