If you managed to save up a nice retirement amount by that time and you don't have a fantastic pension (most of us don't) then you'll need retirement income! Typically the best way to achieve this, say you had $1m in retirement savings, is to invest in a Bond portfolio (5-10 bonds depending on a variety of factors, esp. your fear of default!). Some key facts/things to keep in mind:
- Ideally you buy Govt of Canada bonds, then there's virtually no credit (i.e. default) risk but this will lower your income a lot (no risk no reward!). Looking at this list of CDN bonds (yields, coupons etc.) the best example I can see is a 3.5% coupon CAD bond that yields 1.9%. It's selling at a premium as well but even if it wasn't and you can buy at par, this would earn you $35K a year only
- So what this means is that you'll need to take some Credit risk, hence why I said 5-10 bonds (to diversify that risk). People often jump to Corp's but don't overlook some great Provi's & Muni's! Again consulting the list, I see what must be a typo! There's a Que bond being sold at a huge discount with a 10% coupon and a yield of 98%!! It matures in 2056 so that may have something to do with it but assuming the source is correct, this bond will pay you $100K per year till 2056!
- So that example above is an outlier, typically though with some Provi's, Muni's and Corp's you could have a portfolio (keep in mind we're in a ultra low interest rate environment, so retirees now have it tough, when you retire you want very high IR's {assuming you paid mortgage off doh!}) that maybe avg's a 6% Coupon, so $60K per year. At times of higher IR's you could probably get that $60K per year with only $500K in savings!
I've always thought Bonds were the way to go no question but I'm learning more about this and it seems there are times Dividends could be the way to go (I guess for a temporary amount of time). One thing to keep in mind is that in cases of default etc. Bond holders are higher in the Capital Structure, and while recovery rates can vary greatly, recovering as much as 50% in not unusual but Equity will go to 0! Also, key fact in favor of bonds is that while holding them you are moving towards a known payout (face value) but while holding Equity this is far from certain (though to be fair, stocks with high dividends tend to be blue chip companies who's market price {& Div's} is slowly rising -- look for Dividend Aristocrats).
Having said that, I've recently run across a lot of discussions on receiving income via Dividend streams so I'll post that, I can't say as much about it now as it'll take me time to digest and study this area more. But as I said, it's something to consider as an alternative and I could see at certain times it may be a superior path or perhaps could lead to a combination of bonds + stock portfolio.
Read the responses of "Jim Watkins" & "Eric Rodriguez"
This analysis finds stocks with great yields that are not overvalued
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