3 Secrets of RRSP Millionaires

The secret is out! Here are the easiest ways that investors can use their RRSP to achieve millionaire status for retirement.

| More on:
Happy Retirement” on a road

Image source: Getty Images

When it comes to creating a million-dollar retirement portfolio, many may believe it’s just a dream. Yet still, many Canadians believe it’s a necessity these days.

The average Canadian believes that they need about $1.7 million to retire comfortably, according to a study by BMO. And that’s been increasing at a steady clip since inflation and interest rates are on the rise.

Whether you need that much or not is up for debate. However, there is a way to achieve it. So let’s look at what some millionaires do to gain that amount for retirement.

1. Match it

One of the easiest ways to increase your Registered Retirement Savings Plan (RRSP) is to take part in a company match. This can be particularly helpful if you just cannot seem to get to that full contribution limit outlined in your Notice of Assessment (NOA). And if that’s the case, you’re leaving free money just lying there!

The way it works is that employees can opt into a company’s group RRSP matching program. As you contribute to the group RRSP through a deduction from your payroll, the employer then matches it. That will continue up to a specified amount, or a percentage of your total salary. So if you make $100,000 per year, that’s an extra $5,000 from the 5% from your employer!

There are some downsides, however. First of all, this is still taken out of your income, and it’s still taxed by the government as income from your employer. Furthermore, it’s going to be an amount far less than the maximum allowable contribution. What’s more, if you’re part of a group RRSP, you may not be able to make investment choices yourself. So if you’re maxing out by investing yourself, then it might be better to keep going as per usual.

In fact, saving just 10% of your salary to contribute to your RRSP could still make you a millionaire! Save $6,000 from a $60,000 salary and over 40 years that’s $240,000 that could be invested for millionaire-status.

Max it out

The thing is, if you really want to reach millionaire status, you’re going to want to keep as much cash as you can on hand. And that’s where maxing out on your RRSP comes into play.

For every dollar that you contribute to your RRSP, this comes right off your taxable net income. The more you contribute, the closer you could be to a lower tax rate! A lower tax rate means you’re paying less to the government, and you’re able to keep that cash and receive a refund at tax time.

That being said, while it’s great to try and max out, it’s not a necessity. Instead, look at the tax rates for your province and by the federal government, and see what you would need to achieve a lower tax bracket. This could save you thousands each year, and be put towards your RRSP investments.

Don’t take it out!

There is a reason we have an RRSP and a Tax-Free Savings Account (TFSA). The TFSA is great if you want to invest for short-term goals. However, the RRSP is for retirement. Taking any cash out early can put a huge wrench in your work.

And that comes in multiple ways. First off, if you’re taking out cash from your RRSP, the government is going to mark it as taxable income. So there’s that. Then, on the other hand, you’ve done all this work to figure out how much you need to invest and how long to reach your millionaire retirement status. Taking out cash will put you back by potentially a severe amount!

So millionaires also do not take out cash on the way towards a million dollars. That’s true even if you want to take out cash and keep it, or if you fear that the market will fall. Instead, consider that over time the stock market climbs. Therefore, keep your cash right where it is.

Bottom line

If you’re hoping to achieve $1 million, then follow these rules and consider safe investments through a diverse mix of stocks, bonds, guaranteed income certificates (GIC), and funds. A great option is to find a high-yielding exchange-traded fund (ETF) for free cash you can use to invest!

For example, consider the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY), which has a dividend yield at 4.55% as of writing. The stock invests in equities that have a long history of dividend growth, and shares have risen steadily over the last few years.

If you were to take that $6,000, you could create automated contributions of your own towards this ETF. You then can use the extra cash from the dividend to reinvest into it as well. This will help you gain even more income in the long term, and help you towards that million-dollar status.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Construction work on a site
Dividend Stocks

2 Engineering & Construction Stocks You Can Buy and Hold for the Next Decade

Two prominent engineering and construction stocks are buying opportunities before the industry rebounds and grow in the next decade.

Read more »

Canadian Dollars
Dividend Stocks

For a Shot at $5,000 in Annual Passive Income, Buy 1,975 Shares of This TSX Stock

Are you looking to earn steady income? While there is no certainty in stocks, this stock can give you a…

Read more »

Target. Stand out from the crowd
Dividend Stocks

1 Magnificent Canadian Dividend Stock With 33% Upside to Buy and Hold Forever

Dividend stock Brookfield Business Partners LP (TSX:BBU.UN) is a powerhouse of growth, with even more to come in 2024.

Read more »

top TSX stocks to buy
Dividend Stocks

Passive Income: How Much to Invest to Get $6,000 Each Year

TSX energy stocks such as Enbridge can help you earn a passive stream of recurring income.

Read more »

protect, safe, trust
Dividend Stocks

Income Investors: 2 Safe Dividend Stocks to Own for Passive Income for Years

Long-term passive-income stocks should ideally offer enough dividend growth to counteract inflation while preserving or growing your capital.

Read more »

analyze data
Dividend Stocks

The 1 Best Growth Stock on the TSX Today

Fairfax Financial Holdings (TSX:FFH) stock took a hit, but it's still a great growth play for the long-term.

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

Got $10,000? That’s All the Start-Up Funds You Need to Get Money for Doing Nothing 

Have you been delaying long-term investments for later? Investing money while you are working can help money work for you.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Buy 32 Shares in This Glorious Dividend Stock and Create $1,074.88 in Passive Income

This dividend stock is also a growth stock you're going to want on your side over the next year and…

Read more »