There is an ongoing debate in Canada regarding the percentage of income that working people need post-retirement. Recommendations vary widely, between 40 and 70 percent of the income earned before retirement. Yet, estimating percentages might not be the best strategy as everyone’s circumstances and requirements are different. The main factors to consider are whether you have a workplace pension, when you plan on retiring, at what age you started saving, and what types of assets you have. Keeping these factors in mind, there are plenty of options to save for retirement, including dividend paying stocks, real estate investments, and using TFSA and RRSP accounts.
Investing in Real Estate
Investing in a portfolio of real estate properties is one way to get ready for retirement. How you go about investing depends on your financial goals and risk profile. One strategy is to buy income-producing properties that you can rent out, whether residential homes, duplexes or apartments, or commercial office space. Another idea is to buy real estate you can remodel or upgrade and try to sell it in a rising property market. Also, there are other factors to weigh in when purchasing real estate such as tax considerations and recordkeeping requirements. Other things to consider include:
- Age of the property
- Surrounding area and neighborhood
- Utilities and maintenance costs
- Dept-to-income ratio
- Mortgage rates
- Application and closing costs
- Down payment
- Supply and demand
- Local market indicators
- Compromises that you can handle
Dividend Paying Stocks
Investing in dividend paying stocks is another way to boost your rental income. The main reason to invest in stocks is that they have a strong track record of outpacing inflation. You enjoy the double benefit of consistent, long-term regular income and value appreciation. Here, the two factors to take into account are the rate of return and your risk tolerance. For low-risk investors, the best option would be to invest in established companies with a proven track record of generating significant positive cash flows. A second option is to invest in defensive stocks that provide consistent and stable earnings and dividends. The three defensive sectors to look into are consumer staples, utilities, and healthcare. Across sectors, organizations to consider might be the Canadian National Railway, Bell Canada, Brookfield Asset Management, and Thomson Reuters, to name a few.
Registered Retirement Savings Plan
A registered retirement savings plan (RRSP) is a type of a savings plan and an investment vehicle that allows Canadians to contribute for retirement purposes. There is a wide variety of investments to hold in an RRSP such as mutual funds, bonds, cash, treasury bills, and savings bonds. Other options could be ETFs, corporate, and government bonds, GICs, and silver and gold bars.
The main benefits of contributing to a RRSP are tax deferral, tax-deductible contributions, and a choice between a managed and self-directed investment strategy. Also, contributions are protected from creditors in many provinces and territories, including Newfoundland and Labrador, Prince Edward Island, Manitoba, Alberta, and British Columbia.
In Canada, there are four types of RRSPs – self-directed, group, spousal, and individual. An individual RRSP is a savings plan that is registered in your name. This means that the tax advantages and investments belong to you as the contributor. A spousal RRSP is an investment option for common-law and married couples which can be used to lower taxes and save for retirement. In this case, you can claim the tax deduction but the investments belong to your partner or spouse. A group RRSP is a collective investment tool that allows employees to save into a wide variety of investments through salary deductions. Here, it is up to you to choose the portfolio of investments and the amount that you will be contributing. A self-directed RRSP is a fourth option that allows you to build and manage a portfolio of securities, either on your own or with the help of a brokage. You can choose from different types of securities such as GICs, stocks, exchange-traded funds, and mutual funds. Where you open an account depends on the types of securities you want to include in your portfolio. If you intend to invest in equities directly, you’re better off using a discount brokerage. If you choose to invest in mutual funds, on the other hand, it might be best to open an account with BMO, CIBC, RBC, or another major bank.
Tax-Free Savings Account (TFSA)
A tax-free savings account allows you to grow your money without paying taxes on capital gains, dividends, interest earned, and contributions. You can choose from a wide range of eligible investments such as:
- Guaranteed investment certificates
- Exchange-traded funds
- Shares of a specific small business corporation
- Silver and gold certificates, bullion, and coins
- Debt of the Crown Corporation, a municipality, province, or the Government of Canada
- Share of a mutual fund corporation
- Debt securities or shares of a public corporation
- Securities listed on the stock exchanges
- Cash and deposits with credit unions, trust companies, and banks
In general, the investments that you can hold in a TFSA are the same you are allowed in a RRSP. There are also non-qualifying and prohibited investments such as:
- Interest, share, or debt in a partnership, trust, or corporation with which the accountholder has 10 percent or greater interest
- Debt of the TFSA holder
The three types of tax-free savings accounts that you can choose from are arrangement in a trust, annuity contract, and deposit. Financial institutions that issue TFSAs include trust companies, credit unions, insurance companies, and banks.
Anyone who is 18 year or older, has a valid social insurance number, and is a Canadian resident can open a TFSA. Individuals who no longer live in Canada are also eligible provided that they have residential ties such as medical insurance issued by a territory or province, Canadian credit card or bank account, or a Canadian driver’s license. Relevant ties also include personal property, dependents, common-law partner or spouse in Canada, home, or social ties.
In case of the death of the accountholder, beneficiaries can be any of the following: qualified donees, children, common-law partners, former spouses, as well as persons designated as the successor holder. A successor holder can be a common-law partner or spouse at the time of death who has been named and designated as the successor holder by the deceased.
Other Investment Options
There is a variety of investment options in Canada that can help you save for comfortable retirement. These include stocks, savings accounts, registered disability savings plans, and pooled registered pension plans. When looking into various types of investment tools, you’ll want to factor in the different sources of income you could be entitled to. Examples include government benefits from abroad, the Guaranteed Income Supplement, registered pension plans, Old Age Security, and the Quebec Pension Plan and Canada Pension Plan.