Most working Canadians are employed to ensure they have a comfortable life in retirement. You need to create a retirement nest egg after accounting for monthly recurring costs such as rent, groceries, and utilities.
Here are three retirement savings hacks that could make you rich or at least allow you to lead a comfortable life when the paycheck stops.
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Reduce high-yield debt
Canadians need first to allocate their income to service any kind of debt. You need to pay the highest-yielding debt first, such as credit cards or payday loans, lowering your outstanding debt balance each month.
Max out your RRSP
The Registered Retirement Savings Plan, or RRSP, is a tax-advantaged savings plan. So, any contribution made towards the RRSP is exempt from taxes. You can contribute up to 18% of your annual income towards the registered account.
So, if you earn $100,000 each year, you can contribute $18,000 towards the RRSP, lowering your taxable income to $82,000.
Max out your TFSA
In addition to the RRSP, Canadians should also maximize their TFSA (Tax-Free Savings Account) each year. In 2024, the TFSA contribution room increased to $7,000, raising the cumulative limit to $95,000.
Similar to the RRSP, you can hold a variety of asset classes in the TFSA, including stocks, bonds, mutual funds, and exchange-traded funds. Any earnings generated in the TFSA in the form of dividends, interest, and capital gains are exempt from taxes.
Where to invest your savings
If you can max out your RRSP and TFSA contributions each year, there is a good chance you will be saving more than 20% of your annual income, which is a great start. But where should you invest your savings to generate inflation-beating returns over time?
Well, first, it’s essential to ensure you create a diversified portfolio of asset classes. For instance, if you are 30 years old, you can allocate 70% towards stock, 15% towards bonds, and 15% in gold.
In equities, around 80% should be allocated towards low-cost index funds such as Vanguard S&P 500 Index ETF (TSX: VSP). This low-cost ETF provides you exposure to some of the largest companies in the world, including Apple, Microsoft, Nvidia, Meta, and Alphabet.
Moreover, the VSP ETF is hedged to the Canadian dollar, shielding investors from fluctuations in interest rates. In the last 20 years, the S&P 500 index has returned over 10% annually, allowing long-term investors to steadily build wealth over time.
Investors with a higher risk appetite can consider allocating a small portfolio of their savings toward high-growth stocks such as Shopify (TSX: SHOP). Shopify stock went public in mid-2015 and has since returned 3,340% to shareholders. Despite these market-thumping gains, Shopify stock is down 50% from all-time highs, allowing you to buy the dip and benefit from outsized gains when market sentiment improves.
Valued at $139 billion by market cap, Shopify stock is among the largest companies in Canada. It is forecast to increase adjusted earnings per share to $40 by the end of 2028. Priced at 20 times forward earnings, the TSX stock might return an astonishing 700% if it can expand the bottom line in the next few years.
