I’m 58 and plan to retire in 5 years with a portfolio worth $2.5 million. I expect annual dividend income of $80K but worry this strategy too risky

Pay attention to diversification to keep your dividend income up

With a dividend yield of at least 3.2%, a $2.5-million portfolio could easily generate $80,000 in annual dividends. That kind of yield is doable if you diversify beyond a basic broad-based exchange-traded fund (ETF) and focus on stocks and other assets with higher-than-average dividends.

For investors comfortable with picking and trading stocks, keep in mind that over time a portfolio loaded with growth stocks can experience more volatility due to market growth. For instance, the value of specific stocks in your portfolio can grow so much that the portfolio is overweighted with certain holdings or assets. Also, companies experiencing rapid growth and accelerated gains don’t always pay high dividends because they reinvest their profits to fuel growth and boost stock prices. Plus, companies are not obligated to raise dividends over time, nor are dividend increases guaranteed to match inflation.

For that reason, you need to keep tabs on a portfolio of dividend-paying stocks. A good bet is to rebalance your portfolio on a quarterly basis — either on your own or with a financial adviser.

Another good option is to add other income-generating asset, such as REITs, or real estate investment trusts. REITs are a great choice for those seeking regular income since REITs are required to pay out 90% of their taxable income to shareholders each year. That means adding REITs into your portfolio will help keep your monthly income stable and allow you to avoid dipping into the principal to pay living expenses during your retirement years.

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Keep an eye on inflation

Inflation could impact your investment income dramatically. For instance, if you collect $80,000 in income from your portfolio when you're 60, and collect the same amount when you are 80, inflation over the years will erode the purchasing power of that money and force you to adjust your spending as time goes on — or dip into your principal investment amount.

The Bank of Canada and the federal government has long targeted a 2% annual inflation rate, the midpoint between 1% to 3%, but even a 2% inflation can erode the spending power of $80,000. And things can happen. Remember that the stimulus policies amid the pandemic rapidly drove the cost of goods and services above 2% and other circumstances can always prompt quick price increases.

Consider taxes

Consider tax implications in your dividend calculations. If the dividends are distributed in a non-registered account, you'll have to pay full tax on the earnings. The good news is the Canada Revenue Agency does tax dividend income more favourably than other forms of income — as long as the dividends earned meet the CRA's criteria.

Another option is to shelter your earnings in a registered account, such as a registered retirement savings plan (RRSP) or Tax-Free Savings Account (TFSA). Just be sure you understand when and where it make sense to shelter dividend income in a registered account. To help

On the other hand, if you have a traditional RRSP, you only pay taxes on dividends when you withdraw them.

Your taxes will depend on your filing status and income, as well as what tax thresholds look like in the future. If you're a single tax filer and your income is between $57,375 and $114,750, then you're looking at a tax rate of about 7.56% for eligible dividends and 13.19% for non-eligible dividends. Remember that tax laws and rates can change over time. It’s a good idea to consult a financial adviser to plan your short- and long-term retirement strategy.

Sources

1. Statistics Canada: Assets and debts held by economic family type, by age group, Canada, provinces and selected census metropolitan areas, Survey of Financial Security (x 1,000,000) (Oct 29, 2024)

2. Tax Tips: Canada 2025 and 2024 Tax Rates & Tax Brackets