Retirement can be scary as your active source of income stops, and you have to tackle inflation and rising medical expenses with your retirement pool. At such times, if retirement savings fall in a bear market, investors could make the mistake of withdrawing their investments. An outright withdrawal from the market is not the solution, as you may make temporary losses permanent.
What can reduce your retirement income?
If you are already retired, you probably have a bigger pool of income-generating stocks. If not, then you could be in for a negative surprise.
Mistake #1: Investing a significant portion of your retirement pool in volatile stocks
When planning your retirement portfolio, your asset-allocation plays an important role. Allocation to low-volatility dividend stocks increases, and that toward highly volatile stocks reduces. A risky stock may do well in a growing economy. However, it may lose value in a downturn. Hence, it is suggested you invest only the amount you can afford to lose in volatile stocks.
Avoid investing your retirement savings in BlackBerry (TSX:BB), Cineplex (TSX:CGX), Air Canada (TSX:AC), and Dye & Durham. These stocks have shown small bouts of high growth, but that was not sustainable because of the high-risk nature of their business. BlackBerry has been struggling to grow its revenue, depending on its QNX royalty backlog that kept piling up because of weak automotive demand. It couldn’t revive even in a growing economy, making a weak economy an even tougher environment to generate revenue growth.
Air Canada is a stock to steer clear of because of the capital-intensive nature of the airline industry. While the airline has generated strong profits and revenue due to a rise in air travel demand and low supply, the demand is normalizing. The wafer-thin margins of Air Canada do not support dividend payments and limit the stock price upside.
Cineplex is recovering from the pandemic, but the over-the-top (OTT) trend has hit the secular growth of theatres. Dye & Durham’s professional workplace management software is an attractive offering. However, clashes between the management and shareholders have diluted its return potential.
The above examples of volatile stocks give you a fair idea of why they may not be good for retirement savings.
Mistake #2: Not investing through TFSA
The Registered Retirement Savings Plan (RRSP) is designed for retirement savings, but its withdrawals are taxable. Instead of relying completely on RRSP withdrawals, consider dividing your retirement investments between RRSP and a Tax-Free Savings Account (TFSA). The TFSA withdrawals are tax-free and do not affect your Old Age Security (OAS) pension and Guaranteed Income Supplement (GIS) payouts, which depend on your annual income. RRSP withdrawals are added to your annual income and can lead to OAS clawback.
Mistake #3: Delaying retirement planning to the end
Many in their 30s and early 40s delay retirement planning till the end. And when retirement is upon you, you are out of options and have to take what is left. There is a misconception that retirement planning could take away a large part of your active income. That is not the case.
Investing only $200 a month in a dividend-reinvestment plan (DRIP) of two different stocks that grow their dividends can build you a sizeable retirement income, which will be unaffected by the economic crisis.
A dividend stock to build retirement income
Telus (TSX:T) is a good dividend stock to build a retirement income. It offers a DRIP, grows its dividend by an average annual rate of 7%, and has a yield of 7.75%. The stock has declined to its nine-year low due to a cyclical downturn. Even at that time, it continued to grow its dividends. If you are nearing retirement, you could consider investing $20,000 and buying 963 shares of Telus, which can give $1,546 in annual dividends. The amount will be higher since the company grows dividends semi-annually.
Assuming the company continues to grow its dividend by 6% annually, your retirement income can fight inflation. Moreover, the downside of Telus stock is limited as it trades near its multi-year low. Your $20,000 will grow in the long term as the telco monetizes on the 5G opportunity.