Self-Manage Your Retirement & Boost Your CPP Income

Retirement plan

Canadians are making a huge mistake that will impact their ability to enjoy retirement. They are paying way too much in fees to have other people choose their investments for them in group Registered Retirement Savings Plans and the Canadian Pension Plan.

Royal Bank of Canada (TSX:RY)(NYSE:RY) reported that Canadian defined pension plans only returned 1.7% in the third quarter of 2019. At this rate of interest, the money would be better off in risk-free Guaranteed Investment Certificates (GICs). With a minimum investment of $1,000, Canadian savers can purchase and roll-over short- to long-term GICs at an annually compounded interest rate of 2.9%.

If you have an employer-sponsored retirement plan, you are likely paying up to 2% of your retirement funds in fees to have someone else manage the retirement portfolio. These plans are unlikely to give you higher returns than would self-investing in a Tax-Free Savings Account and Registered Retirement Savings Plan. In employer-sponsored pooled and group Registered Retirement Savings Plans, savers don’t have the luxury of choosing high-return investments. Strangers decide where to invest the money, and those decisions may not always be the most profitable.

With more confidence and a few tips, aspiring Canadian retirees can easily choose high return stocks to retire in style and boost their CPP income.

Canadians can earn high, risk-free interest premiums

If savers in Canada want to capture an excellent risk-adjusted interest rate premium, investing directly in Royal Bank of Canada is one of the best available options. Royal Bank of Canada issues a quarterly dividend of $1.05 per share for a yield of 3.86% at the current share price of $108.73. Even better: investors might as well consider the dividend return risk-free interest.

Some Canadian savers may mistakenly believe that RBC stock carries more risk than GICs. To a certain extent, they would make a decent point. GICs do guarantee a replacement of the initial investment, whereas stocks do not come with any warranties on a principal balance. Nonetheless, it is essential to remember that Royal Bank of Canada has only suffered from very short and temporary declines in stock price.

The past may not always be the best predictor of the future, but it is fair to say that RBC will probably continue to experience strong price momentum in the future. Even during the 2007 financial crisis, RBC stock only experienced a temporary fall in share value for one year during 2009.

Self-managed portfolios could easily return 61.6% per year

If you had purchased RBC stock in January 1995 at $6.63 per share, you would have earned a return of 1,540% or an average return of 61.6% per year, not including dividend payments.

It isn’t too late to buy RBC stock and achieve a similar level of return over the next 25 years. RBC is one of the most politically well-connected and influential institutions in Canada. The bank has been a signature landmark of the Canadian economy for 155 years. In another 25 years, RBC will still be just as profitable, if not more.

Banks are also a special part of the economy in that they are too crucial a component for the government to allow them to fail. The banking system is secure in Canada and other developed countries, because we dictate monetary policy and bank liquidity through multiple channels. The chances of a steep plummet in the value of RBC is imperceptible.

Foolish takeaway

Far too few Canadians know how easy it is to self-manage retirement portfolios. Instead, Canadians depend too much on low-yield Canadian Pension Plan payments and employer-sponsored funds.

The best strategy for hard-working Canadian savers is to contribute the minimum required to earn employer retirement contributions in group plans and put the rest of their savings into self-managed stocks and GICs.

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Fool contributor Debra Ray has no position in any of the stocks mentioned.