Retirement planning is a goal investors often start working towards by investing in their mid-30s or early 40s. And it makes perfect sense, as financial goals, like buying a house, travelling, and family planning, take priority. The Registered Retirement Savings Plan (RRSP) contribution is higher among 45–65-year-olds than 25-45-year-olds.
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Average RRSP savings at age 44
According to data from Ratehub, Canadians in the 35–44 age group have an average RRSP balance of $49,014. This balance is 47% of their total retirement savings of $104,159. If you have an RRSP balance similar to the average, you are on track to a comfortable retirement. Just keep the pace going.
How much do you need to live a comfortable retirement?
The Canada Pension Plan (CPP) average monthly payout is $736.58, and the maximum payout is $1,306.57 in 2024. Suppose you earn $5,000 a month, the CPP can give you 15% to 26% of the monthly expense. And with the CPP enhancement, the CPP payout could go up to 33% of your average monthly salary. There is also an Old Age Security (OAS) monthly pension of $727.67 if your annual income is below $148,451 in 2024. It means another 15% could be taken care of by the OAS.
The remaining 60–70% of your expenses have to come from your retirement savings. Assuming CPP and OAS give you $1,464 in pensions, your retirement pool should give you $3,500 in monthly income ($42,000 in annual income). A $700,000 portfolio with a 6% annual yield can give this amount.
And these numbers are for 2024. If you are to retire at age 65, add 3% annual inflation for 20 years. In 20 years, you will need a monthly passive income of $6,321.
How to plan your RRSP passive income from $49,014?
The power of compounding can help you achieve the $6,321 figure and maybe even more in less than 20 years with your $49,000 RRSP balance. All you need is a portfolio of dividend stocks with a dividend reinvestment plan (DRIP) and a dividend growth rate of more than 6%.
Manulife Financial (TSX:MFC) and Telus Corporation offer DRIP and have been growing their dividend at an average annual rate of 10.8% and 7%, respectively, for the last 10 years. Other high dividend growth stocks like goeasy and Capital Power give you more than 6% dividend growth, but they do not offer DRIP.
Compounding RRSP savings
I will take the example of Manulife Financial, which has a yield of 3.9% and is trading near its decade-high of $40.85. The stock mostly trades in the $20–$27 range. During a forecast, it is always better to have a conservative estimate. That’s assuming the company grows its dividend at an average annual rate of 9% for the coming 17–20 years and has an average stock price of $30.
A $49,014 investment would be compounded in the following manner.
| Year | MFC Stock Price | New DRIP Shares Added | Total Share Count | MFC Dividend per Share (9% CAGR) | Total Dividend Amount |
| 2024 | $40.85 | 1200.51 | 1,200.00 | $1.600 | $480.00 |
| 2025 | $40.00 | 12.00 | 1,212.00 | $1.744 | $2,113.73 |
| 2026 | $35.00 | 60.39 | 1,272.39 | $1.901 | $2,418.77 |
| 2027 | $35.00 | 69.11 | 1,341.50 | $2.072 | $2,779.65 |
| 2028 | $35.00 | 79.42 | 1,420.92 | $2.259 | $3,209.19 |
| 2029 | $30.00 | 106.97 | 1,527.89 | $2.462 | $3,761.36 |
| Continued… | |||||
| 2039 | $30.00 | 745.57 | 4,928.89 | $5.828 | $28,725.43 |
| 2040 | $30.00 | 957.51 | 5,886.40 | $6.352 | $37,393.31 |
| 2041 | $30.00 | 1246.44 | 7,132.85 | $6.924 | $49,389.35 |
As there is only one quarter left for 2024, a $49,014 investment will buy you 1,200 shares of Manulife and give you $480 in annual dividends. This amount could buy 12 DRIP shares at $40. Now, the compounding will happen quarterly. I have only taken annual compounding for ease of calculation. The DRIP will increase the share count and the company will increase the dividend per share.
At the end of 2041, your RRSP portfolio could earn $6,924 in annual passive income. Now this is the monthly income you need in 20 years. You can create 10 to 12 such portfolios in different stocks and securities and increase your annual passive income to $42,000.
