Retirement has become a financial stress rather than a long vacation everyone dreamed of. BMO’s 15th annual Retirement Survey found that 63% of Canadians are worried that rising inflation is affecting the money they set aside for retirement savings. Come to think of it, we often put retirement plans on the back burner to meet the current financial challenges.
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The value of time in investment
We think we will catch up on the missed savings next year or maybe the year after. By the time we pump up the retirement pool, it is too late, and we have lost the benefit of compounding.
To give you a gist of the power of compounding, I plugged a few numbers into an investment calculator, and the math was shocking. A $1,000 annual investment for 40 years can earn you almost three times more money than a $1,000 annual investment for 30 years, assuming a 12% annual return.
| Investment Horizon | 40 Years | 30 years |
| Annual Investment | $1,000 | $1,000 |
| Annual return | 12% | 12% |
| Invested Amount | $40,000 | $30,000 |
| Portfolio value | $849,172 | $267,082 |
The opportunity cost of 10 years of procrastination is significant in compounding because it reinvests the interest to earn more interest.
“Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.” – Albert Einstein.
An investment strategy that caters to today’s retirement needs
Coming back to the root cause of the problem, inflation is eating up the money allocated for retirement. The survey found that Canadians are:
- Reducing their retirement savings, some even putting them off completely,
- Cutting down on spending to maintain savings,
- Or working longer to earn more.
Increasing income and cutting spending can help you stay on target, but it may not tackle the situation.
Inflation is a reality, and your investment strategy needs to adapt to this reality or risk becoming obsolete. Term deposits, while safe, cannot help you fight inflation. Dividend stocks paying static dividends for years cannot address the inflation reality. Your retirement portfolio needs stocks that grow and also pay income.
The $6,000 investment strategy to transform retirement
You may not have the luxury of 40 years until retirement. However, you can reduce the opportunity cost of lost time by increasing the invested amount and portfolio returns.
This $6,000 investment strategy will divide your investments into growth and dividend-growth stocks. The investment timeframe would be 20 years.
$3,000 in a growth stock
Topicus.com (TSXV:TOI) is following in the footsteps of its parent Constellation Software and efficiently compounding its business. Topicus.com acquires vertical-specific software companies in Europe and uses the cash flow from acquired companies to buy more such companies. Every new acquisition builds on the size of the company and increases the value of its shares. The growing-through-acquisition strategy has increased its share price by 52% in a year.
The 5G momentum, the artificial intelligence (AI) boom, self-driving cars, and more technological advancements will create more software opportunities. Topicus.com is poised to tap this growth and deliver a 20–30% average annual return in the long term. You could consider investing $3,000 in this stock and holding it as long as the software opportunity lasts.
This can help you come closer to a million-dollar portfolio in the long term. A portfolio that gives a 20% annual return can convert a $3,000 annual investment to a $653,000 portfolio in 20 years.
$3,000 in DRIP stock
Growth stocks have a downside risk during an economic crisis, which can affect your retirement savings. That’s where dividend stocks can balance returns. A stock with a dividend reinvestment plan (DRIP) can compound your income payout by reinvesting the dividend to buy more shares of the same company at a discount and without a brokerage.
Manulife Financial (TSX:MFC) has been paying dividends for the last 12 years and has been growing them at an average annual rate of over 10%. Dividend growth helps your passive income fight inflation. The company also offers a DRIP that helps you compound your income and take a larger payout in the future when you exit or the company pauses the DRIP.
