Pension income can come from a number of sources, including a company pension, CPP, and OAS payments. Canadians are also encouraged to contribute to their RRSP and TFSA to set aside additional funds.
Self-directed investors now have many tools available to them to help make investing decisions. The internet has enabled people to use direct-trading platforms, often provided through the banks, and the wealth of information available online makes it easier to evaluate investing opportunities.
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The main challenge lies in finding ways to grow savings over time.
In 2019, bond yields have fallen significantly, and it appears rate hikes are finished at the Bank of Canada. In fact, rate cuts are starting to appear more likely in the coming months and through 2020, especially after the United States just made its second cut for 2019.
Lower interest rates put pressure on the rates banks will offer on GICs. For example, investors were able to pick up a five-year GIC last fall with a 3.5% yield. The best offers today are just above 2%.
In this environment, investing in quality dividend stocks is an attractive option.
The best stocks to buy tend to be market leaders with strong track records of dividend growth supported by rising earnings.
Using the dividends to buy additional shares is recommended as a way to leverage the power of compounding. When this strategy is combined with the long-term increase in the share price, the impact on a modest retirement portfolio can be impressive.
Let’s take a look at one example that might be a good pick to get you started.
Royal Bank
Royal Bank of Canada (TSX:RY)(NYSE:RY) is the country’s largest company with a market capitalization of $154 billion.
The bank is a profit machine, generating earnings of $12.4 billion in fiscal 2018. That’s more than $1 billion per month, and the company is on track to surpass the level again this year.
Royal Bank gets revenue from a blend of segments in the financial sector, including personal and commercial banking, capital markets, wealth management, and insurance.
The bank boosted its presence in the United States with a US$5 billion acquisition of California-based City National in late 2015, and additional deals could emerge in the coming years.
The company has a strong track record of raising the dividend in line with annual increases in earnings per share. The current payout provides a yield of 3.9% and should grow by 5-10% per year over in the medium term.
Royal Bank has a strong capital position with a CET1 ratio of 11.9% at the end of the most recent quarter. This is important, as it measures the bank’s ability to ride out a financial crisis.
Management is investing heavily to build out robust digital banking solutions for customers to ensure the bank remains competitive in a changing environment where mobile banking is becoming more popular.
Long-term investors have done well with the stock. A $100,000 investment in Royal Bank just 20 years ago would be worth nearly $1.4 million today with the dividends reinvested.
The bottom line
Owning quality dividend stocks and using the distributions to buy additional shares is a proven strategy for building wealth for retirement.
Royal Bank is just one example of a top dividend stock that has helped investors create a comfortable nest egg for the golden years.
The TSX Index is home to several companies that have generated similar, or even better, returns. Even if you are getting a late start, it’s possible to build a substantial retirement fund.
Fool contributor Andrew Walker has no position in any stock mentioned.
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A $1 million retirement account gives you around $40,000 per year for the first few years of your retirement. Once Social Security kicks in, this will give you on average anywhere from $65,000 to $95,000 per year depending on your lifetime earnings and when you began collecting benefits.
So, if you're aiming for $100,000 a year in retirement and also receiving Social Security checks, you'd need to have this amount in your portfolio: age 62: $2.1 million. age 67: $1.9 million. age 70: $1.8 million.
When thinking about how to invest 100k for passive income, again, REITs are the answer. For example, some REITs pay dividend yields of 5% or more. Some REITs also pay monthly dividends, such as Realty Income Corp., which would generate a monthly income of between $350 and $400.
How To Use the Rule of 72 To Estimate Returns. Let's say you have an investment balance of $100,000, and you want to know how long it will take to get it to $200,000 without adding any more funds. With an estimated annual return of 7%, you'd divide 72 by 7 to see that your investment will double every 10.29 years.
According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
According to a 2020 working paper from the Center for Retirement Research at Boston College, the top 1% of retirees-which a retiree with $4 million in assets would fall into-can expect to pay about 22.7% in state and federal taxes.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Others recommend saving half your salary by age 25, one year of salary by age 30, three to five years of salary by age 40, and around five years of salary by age 50.
How Much Should a 70-Year-Old Have in Savings? Financial experts generally recommend saving anywhere from $1 million to $2 million for retirement. If you consider an average retirement savings of $426,000 for those in the 65 to 74-year-old range, the numbers obviously don't match up.
Bottom Line. With $100,000 you should budget for a retirement income of around $5,000 to $8,000 on top of Social Security, depending on how you have invested your money. Much more than this will likely cause you to run out of money within 25 – 30 years, which is potentially within the lifespan of the average retiree.
The 4% withdrawal rule was designed for the classic retirement age of 62 to 65 years with the idea that you'll potentially need retirement savings into your 90s. Today, retirements take all shapes and forms. Some people look to keep working and stay busy into their 70s. Others aim to retire early.
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
The timeline for achieving this goal depends on your returns. For example, a 10% average annual rate of return could transform $100,000 into $1 million in approximately 25 years, while an 8% return might require around 30 years.
At 4.25%, your $100,000 would earn $4,250 per year. At 4.50%, your $100,000 would earn $4,500 per year. At 4.75%, your $100,000 would earn $4,750 per year. At 5.00%, your $100,000 would earn $5,000 per year.
The index can be volatile; the S&P 500 might go up or down 20% or more in a given year. But it averages about 10% annualized returns over decades. Now, doing the same math as above, it would take your $100,000 just over 23 years to hit $1 million without additional contributions.
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