Canadian households should aim to maximize their RRSP (Registered Retirement Savings Plan) contributions to benefit from the tax-sheltered status of this registered account. Every dollar held in the RRSP will help you build a retirement corpus and lower your annual tax liability.
The primary aim of the RRSP is to maximize your retirement savings. For example, if you earn $100,000 each year, you can contribute up to $18,000 annually to the RRSP, lowering your taxable income to $82,000.
How much has the average Canadian saved for retirement?
According to a report from Ratehub, the average 65-year-old has saved around $129,000 in their RRSP. If we include the TFSA (Tax-Free Savings Account) contributions, the figure rises to $160,000, while cumulative savings are much higher at $319,000. Moreover, the average retirement savings for Canadians over the age of 65 is $272,000.
But is this number enough for retirees to lead comfortable lives? Given that retirees have a lower risk appetite, let’s assume they would invest the majority of their savings in fixed-income instruments such as Guaranteed Investment Certificates (GICs). Right now, several GICs offer investors a yield of 5% as interest rates remain elevated. This means investors could earn $13,600 in annual interest on an investment of $272,000.
Canadian retirees will also be eligible for pension plans such as the Canada Pension Plan (CPP). In 2024, the average monthly CPP payout for a 65-year-old retiree is $831.92, indicating an annual payout of $9,983. It means that the average Canadian could earn $23,500 by holding retirement funds in the GIC and receiving a monthly pension.
If we exclude rental costs, a single individual will spend around $1,448 each month in Canada, and this number might be much higher in larger cities such as Toronto and Vancouver. So, it might seem that the average Canadian homeowner with $272,000 in savings can cover the basic expenses right now.
Alternatively, with interest rates set to move lower, the yield on GICs should decline over the next two years. Retirees can instead consider investing in blue-chip dividend stocks to benefit from a steady income stream and long-term capital gains.
Invest in blue-chip dividend stocks
One quality TSX dividend stock is Brookfield Infrastructure Partners (TSX:BIP.UN). In the last decade, BIP stock has returned 142% to shareholders, while cumulative returns are much higher at 292% if we include dividend reinvestments. Despite these outsized gains, BIP stock trades 26% below all-time highs and pays shareholders an annual dividend yield of 5.3%.
Brookfield Infrastructure continues to grow its funds from operations (FFO) per share to US$0.77 from US$0.72 in the last 12 months. Comparatively, it pays shareholders a dividend of US$0.405 per share, indicating a payout ratio of less than 55%.
Brookfield’s FFO rose by 10% to US$608 million in the June quarter as it benefitted from organic growth and acquisitions. The company attributed its strong performance in the second quarter to inflationary rate hikes across verticals such as utilities and transportation as well as higher revenue in its midstream operations.
Brookfield Infrastructure can help retirees can lock in a tasty yield in 2024. Additionally, these payouts have more than doubled in the last decade, enhancing the effective yield over time.
