How to Retire Early With Enormous Income the CRA Can’t Tax!

Early retirement handwritten in a note

The Canada Revenue Agency (CRA) needs to get a bit of a break. The CRA has a job to do, even though that job is to collect a percentage of your hard-earned income. However, there are ways to keep some of that cash to yourself if put in the right place.

Today, we’ll look at what it takes to create income that the CRA doesn’t have a right to tax and how to turn it into a monstrous amount such that young investors could even afford to retire early.

Automatic to the right account

If you’re going to start saving for retirement early, first off, good for you! It’s something that young Canadians simply aren’t doing enough of and can save a lot of stress in the years to come. But beyond that, where do Canadians put that cash?

The answer is in two places: the Registered Retirement Savings Plan (RRSP), as well as the Tax-Free Savings Account (TFSA). Both have their benefits, but if you want to retire early while still having the option to withdraw funds, the TFSA is your best bet.

By simply staying within the $88,000 contribution limit, along with the around $6,500 added each year, you can earn income the CRA cannot tax! And my best suggestion? Make automatic contributions each and every month. Adding $500 each month means creating $6,000 in contributions a year!

How much will you need?

Now comes the tricky part. If you’re going to retire early, it varies on how much you’re going to need in retirement. But let’s say you’re a 25-year-old looking to retire in the next 30 years. That means you’re going to need to create enough savings that will allow you to live comfortably for around 40 years or more after that!

Granted, you’re not going to take all the cash out at once. It will continue to increase and make more returns for your future. But still, to retire at 55, let’s say you need an income of $70,000 per year. Half could be in your RRSP, so the other half would mean creating $35,000 per year in savings. That’s a total of $1.4 million! In 30 years? It can be done.

Get the right investment

To get to this goal, you’re going to need a strong blue-chip company that won’t disappear in the next few years or even decades. One that will continue to grow because it’s done it before. A strong option I would consider is Dividend Aristocrat Manulife Financial (TSX:MFC). Manulife stock provides insurance, something we all need, but it is doing poorly thanks to higher interest rates. However, the stock is sure to turn around in the near future when the market recovers.

When that happens, Manulife stock should see shares surge. Yet as of now, shares trade at just 3.57 times earnings! Further, you can bring in a 6.09% dividend yield as of writing. So, here’s what could happen in the next year should shares return to 52-week highs.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCYPORTFOLIO TOTAL
MFC – now$24250$1.46$365quarterly$6,000
MFC – highs$27.50250$1.46$365quarterly$6,875

You could earn $875 in returns and $365 in passive income. That’s a total of $1,240 in your first year. From there, shares could continue growing at a compound annual growth rate (CAGR) of 3%, as it has in the last decade. Meanwhile, its dividend has grown at a CAGR of 11% in that time! These dividends can be reinvested again and again, creating more income year after year. In fact, it would end up taking about 20 years to reach your goal!

So, with that, enjoy retirement. You literally earned it.

The post How to Retire Early With Enormous Income the CRA Can’t Tax! appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.