Building a Retirement Paycheque: Where Each Dollar Comes From

Have you thought about retirement? Where will your paycheque come from once employment income is gone? The Canada Pension Plan (CPP) and Old Age Security (OAS) will provide some inflation-adjusted income. However, will it be enough to meet your expenses? What if you divide each of your daily expenses into a source of passive income and keep accumulating stocks until you achieve the desired amount? This way, you can keep reducing dependency on employment income and divert more employment income towards building a diversified portfolio.

Building a retirement paycheque

To build passive income to cover expenses, consider starting with the largest expense, as it will take time to build. Groceries are a bigger expense and cost close to $500 per month per person. That means you need $6,000 annually. Assuming grocery costs increase at an average annual rate of 3%, you will need $9,348, or close to $780 per month, in 15 years.

Invest the amount you need as a payout 15 years from now, and you can get it using the power of compounding. You can simultaneously build a portfolio for a smaller expense, like broadband, which costs between $70 and $100 per month. Smaller goals are faster to fulfill and can give you motivation to keep going.

Planning where each dollar comes from

Investing in CT REIT (TSX: CRT.UN) through a Tax-Free Savings Account (TFSA) is a good source of passive income for grocery bills for four reasons:

• It gives monthly payouts.
• It increases dividends every year in July by an average annual rate of 3%, helping you earn inflation-adjusted passive income.
• CT REIT offers a dividend reinvestment plan (DRIP) that helps you compound your returns and achieve the target faster.
• CT REIT is a low-risk stock as the dividend payout ratio is below 75% and the rental income from which the payout is funded is stable. The parent, Canadian Tire, pays its subsidiary. This intercompany transaction removes the risk of non-occupancy, advertising costs, and brokerage.

You could consider investing in CT REIT to pay for grocery bills. The amount to invest should be the estimated grocery bill 15 years from now. A good way to build confidence in a strategy is to backtest it. Today you need an average of $500 per month, or $6,000 annually, for groceries. Had you invested this amount in CT REIT since 2014, you would have achieved your desired passive income by 2025, considering you chose the DRIP option.

Where to use TFSA and RRSP for your retirement paycheque

TFSA allows you to withdraw tax-free and even reinvest the amount withdrawn by adding it back to next year’s TFSA contribution room. Registered Retirement Savings Plan (RRSP) provides a tax deduction on contributions, but makes withdrawals taxable. When sourcing your retirement paycheque, calculate your taxable income. Remember, CPP and any other private pension will be added to taxable income. While you can’t control those amounts, you can control RRSP withdrawals.

A higher taxable income could lead to OAS clawback. (If your 2025 taxable income is above $93,454, the CRA will begin OAS clawback.) You have to balance your retirement paycheques such that they don’t increase your taxable income beyond the OAS threshold.

Retirement planning can be tricky, as you need to balance RRSP’s tax deferrals and TFSA’s tax-free withdrawals. While things may not always go as planned, if you can achieve even 50–70% of your target, CPP and OAS can take care of the rest.