Written by Puja Tayal at The Motley Fool Canada
Planning for retirement is the biggest and longest investment you ever make. You are creating an investment portfolio that gives you a monthly paycheck 20-30 years from now as per that time’s living expense and continues paying till your last breath. You have Canada Pension Plan (CPP) and Old Age Security (OAS) too, but you need an emergency pool for the unknown and another source of passive income to maintain your lifestyle.
How to make an ultimate retirement game plan
Life doesn’t always go as planned. Hence, the ultimate game plan is to optimize all available resources and diversify your income streams instead of relying on one or two. Retirees of today can earn up to $1,500/ month ($811.21 average CPP payout + $691 maximum OAS). This amount can meet their basic expenses if they don’t have any rent or debt expenses.
The Canada Revenue Agency (CRA) introduced CPP enhancement in 2019 to provide a third of retirees’ earnings as the CPP payout. To get the maximum CPP payout, you have to make a maximum CPP contribution for 39 years of your working life (from 25 to 65). The maximum CPP contribution for 2023 is $7,508.90, up 7.28% from 2022.
And if you delay your CPP payout to age 70, you can grow the payout by 42%. (The CRA increases your CPP payout by 0.7% per month if you continue CPP contributions beyond age 65.) You can maximize your CPP benefit if you have the financial freedom to choose when to take a CPP payout. Passive income from a Tax-Free Savings Account (TFSA) can give you this freedom.
The TFSA returns for financial freedom
The CRA sets a TFSA contribution limit every year, which is $6,500 for 2023. You can invest in Canadian and U.S. stocks through TFSA and let your investments grow tax free. Depending on how far your retirement is, you can divide your portfolio between high-growth stocks, growth stocks, and dividend stocks.
If you have 15 years to retire, consider investing 60-80% in growth stocks and 20-40% in dividend stocks, depending on your risk profile. TSX has some of the best dividend stocks, like Enbridge (TSX:ENB) and BCE.
Dividend side of TFSA retirement planning
Enbridge stock is a buy when it is closer to its 52-week low, as you can lock in a dividend yield of over 7%. The pipeline stock has a 67-year dividend history and has grown dividends most of the years.
While Enbridge has paused its dividend-reinvestment plan, you can use the dividend income to buy more Enbridge shares or BCE shares, which also have a good dividend-growth trajectory and a 6% dividend yield.
Suppose you invest $1,500 in Enbridge now; you can buy 30 shares and earn yourself a $106.5 annual dividend (30 x $3.55 dividend per share), which is sufficient to buy two more Enbridge shares. These two shares will also give dividends, compounding your returns. In 15 years, this could become a significant amount.
The growth side of TFSA retirement planning
The remaining $5,000 of your TFSA contribution can go into U.S. stocks with assured growth potential. There are stocks like Tesla and Nvidia (NASDAQ:NVDA) with the potential to grow your money multiple-folds in five to seven years.
For instance, Nvidia stock surged 586% in the last five years, riding the crypto bubble, 5G network infrastructure, and artificial intelligence (AI) boom. It has more growth in its arsenal as edge computing and autonomous cars have not yet begun their growth trajectory. A US$2,000 investment in Nvidia in July 2018 would be over US$13,500 today. If you sell some of the stocks now, you will have money to invest in other high-growth stocks.
You can sell one stock of Nvidia for US$424 and buy 100 shares of Hive Blockchain Technologies on the TSX when the stock falls to $4 or lower and sell it at $8 or $10 price.
You can enhance your TFSA investment beyond $6,500 through dividend reinvestment and opportunistic profit booking in growth stocks.
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