If you want to earn extra investment income for retirement, you need to start planning and preparing now. A thoughtful retirement plan can help you sleep well at night and provide achievable targets.
An extra $2,000 per month in investment income can go a long way in retirement. If you are wondering how to get there, here are some ideas on how to build a solid passive-income portfolio. Let’s do the math below.
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With an index, you will need to accumulate $1.2 million for retirement
$2,000 per month equals $24,000 per year in passive income. A Canadian market index like iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC) has a trailing yield of 2%. It has compounded shareholder total returns by an 8.4% compounded rate since inception. Returns have been even better in recent years, given strong TSX performance in the past few years.
If you divide $24,000 by a 2% yield, you will find that you would need $1.2 million invested to earn an average of $2,000 per month. If you are in your 40s today, you will still have 20 years to build up your retirement portfolio.
Say you were starting out with $50,000 invested in the above index. You would need to contribute $1,653 every month over 20 years to hit $1.2 million of savings by the time you are ready to retire (around 65 years old).
Increase your rate of return to reduce how much cash needed for retirement
On a side note, it would be wise to use a combination of Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) contribution maximization to help prevent any tax erosion on those returns.
You also might be able to do better by building your own portfolio and seeking out higher returns. If you could increase your total annual returns to 10%, you would only need to contribute $1,256 by retirement.
Likewise, if at retirement you built a portfolio that yielded an average of 4%, you would only need $600,000 invested to earn $2,000 per month. That is half the cash you would need if you only invested in an index. That would reduce your monthly savings rate over a 20-year period to only $608, which is a little more achievable.
Granite REIT
If that sounds good to you, one stock you might want to look at is Granite Real Estate Investment Trust (TSX:GRT.UN). This stock yields just under 4% right now.
It has 141 income-producing industrial, logistics, and manufacturing properties across Canada, the U.S., and Europe. It is exceptionally well-managed with 98% occupancy, high-grade tenants, and long-term leases. The REIT has a 15-year history of growing its dividend, so your yield on cost will only rise over time. It’s a nice, safe bet for a mix of capital and income returns.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is another top stock for a retirement portfolio. It yields 4.12% today. It is Canada’s largest energy producer with over 1.57 million barrels of oil equivalent per day in production.
The company can produce at a very low cost, and it has decades of reserves that it can unlock at marginal cost. It operates with factory-like efficiency. With a huge production base and a strong balance sheet, it is well-positioned to reward shareholders for decades.
This company has raised its dividend consecutively for 25 years. Like Granite, it is a great stock to hold for income and capital appreciation inside a retirement portfolio.
