Age 54 is a crucial one when you’re planning for retirement. The coming years are your last chance to boost your pension payouts since you’re still working and are probably at the height of your income-earning potential. Taxes are also a factor to consider. The Canada Revenue Agency (CRA) offers several tax-saving instruments, such as the Registered Retirement Savings Plan (RRSP), that help you deduct your contributions from taxable income.
How do your RRSP savings stack up?
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Average RRSP savings at age 54
Canadians in the 45-54 age group have an average $214,320 in retirement savings, with $98,447 invested in an RRSP and $105,050 in non-registered accounts, according to Ratehub.
Why should you invest in an RRSP?
The trouble is, keeping a major portion of your retirement savings in non-registered accounts is not tax-efficient. Those accounts don’t allow your investments to grow tax-free. You pay capital gains taxes on every stock sale. You also pay dividend taxes, even if you’re invested in a dividend reinvestment plan (DRIP).
Hence, it is better to save for retirement in an RRSP because your investments can grow tax-free. Moreover, the tax refund you get from RRSP contributions can be invested in a Tax-Free Savings Account (TFSA).
How to save more in an RRSP
Let’s say you have the average retirement savings of $214,320 at age 54 and want to build it into $1 million over the next 11 years (when you turn 65). You’d need an investment portfolio that could grow your money at a compounded annual growth rate (CAGR) of 15%. Achieving a 15% CAGR is possible by investing in a growth stock. At 54, buying a growth stock might seem aggressive, but you can consider investing in resilient growth stocks alongside safer dividend stocks.
Here are two I like.
Constellation Software
Constellation Software (TSX:CSU) is a resilient growth stock whose price grew at a CAGR of 30% in the last 10 years. And even though the stock is currently trading around $4,300, the price has the potential to rise 20-25%. The secret behind its consistent growth is the power of compounding.
Constellation buys software companies in niche areas that have stable cash flows. It acquires such companies and enjoys the 2-3% organic growth they bring. Then it uses the cash flows from those acquired companies to buy more companies, thereby compounding returns. With every acquisition, Constellation’s value grows and gets reflected in its rising stock price.
Whenever there’s a dip in tech stocks, it’s a good time to buy Constellation, as it can acquire companies at a discount. And when tech stocks revive, Constellation’s stock grows at a higher rate.
Descartes Systems
Another resilient growth stock is Descartes Systems (TSX:DSG), which offers supply chain management services. It offers inventory and route management, warehousing, compliance and several other solutions. All parties in a supply chain come on one platform, making communication and documentation smooth and easy.
Descartes caters to a wide range of businesses, including e-commerce, airlines, and oil and gas companies. The weakness in one sector can be offset by strength in another, enabling Descartes to grow its revenue and profits steadily. And although the business is exposed to trade and logistics risks, its long-term growth potential remains strong.
Regardless of your age, consider buying and holding Constellation and Descartes in an RRSP to build a sizeable retirement nest egg.
