Relying on a defined-benefit pension, CPP, and OAS payments used to be the home-run formula for retirement planning, but that strategy is losing steam.
The CPP and OAS will likely still be available in retirement for people who are currently in their 20s or 30s, but the defined-benefit pension plan is tough to find today. Most companies now have defined-contribution plans where the risk shifts to the employee. Under this program, the company matches or exceeds an employee’s contribution to a fund and the retirement payouts are determined by the returns the fund generates, rather than being guaranteed by the company.
In addition, many people are choosing to be self-employed or can only find work on contracts. In these cases, there isn’t a company pension to rely on and that means taking more responsibility for retirement planning.
One option involves building a passive income portfolio in a TFSA.
The current contribution limit is $63,500, which is expected to increase by at least $6,000 per year going forward. If this proves to be the case, Canadian residents who were at least 18 years old in 2009 would have total contribution room of $213,500 available in 25 years.
It would take some discipline, but setting aside $500 per month would enable someone to make their $6,000 per year contribution. If the funds are invested in dividend stocks and the distributions are used to acquire new shares until the time comes to start using the payouts for living expenses, a person could easily end up with a substantial fund ready to pay for a comfortable retirement.
Which stocks should you buy?
The best picks have historically been companies that have rising dividends supported by growing revenue and higher profits. Let’s take a look at one stock that serves as a good example to start a TFSA retirement portfolio.
Fortis is a top 15 North American Utility with electric transmission, power generation, and natural gas distribution assets in Canada, the United States, and the Caribbean.
The company gets most of its revenue from regulated businesses, which is attractive for dividend investors, as it means the cash flow should be steady and predictable. Fortis grows through acquisitions and organic developments and has done a good job of integrating big deals and boosting revenue through tuck-in projects.
The board has raised the dividend for 45 straight years and Fortis intends to bump the payout by an average of 6% per year through 2023. Investors who buy today can pick up a yield of 3.5%.
A 10,000 investment in Fortis 20 years ago would be worth more than $120,000 today with the dividends reinvested. At the current dividend payout, the initial investment would now generate $4,200 per year in passive income. Nice!
The bottom line
As you can see, the power of compounding can turn small initial investments into substantial savings over time. Fortis is a good place to start and there are many top-quality stocks in the TSX Index that have generated similar or better returns and should continue to be solid picks for a TFSA retirement fund.
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Fool contributor Andrew Walker has no position in any stock mentioned.