How to Build Your Own Pension With a TFSA

Proper planning, plus a little math, can help you retire easy with a private pension that leverages long-term winners like Enbridge Inc. (TSX:ENB)(NYSE:ENB) and Fairfax Financial Holdings Ltd (TSX:FFH).

| More on:

If you’re lucky enough to have a pension, then congratulations. Having a pension is a huge advantage during retirement. Still, everyone can use a backup plan in the form of their own capital. If you don’t have a pension, this is even more important.

It’s important to know that you can build your own private pension through proper planning. Whether you want a pension that delivers $10,000 or $100,000 per year is up to you, but everything helps when you’re trying to avoid outliving your money.

How do you create your own pension? All it takes is three simple steps.

Find your number

The first step is to figure out how big you’d like your pension to be. Be realistic with this. Should it be supplementary or comprehensive? Don’t worry about how much you need to save; that math is easy. Simply determine how much you’d like your pension to deliver on an annual basis.

Let’s assume you’d like an annual pension of $40,000. Simply multiply that amount by 20 to determine how much you need to save. In this case, it would be $800,000. Multiplying by 20 assumes a 5% withdrawal rate. That figure helps account for additional growth, inflation, and market volatility, plus a small cushion to avoid outliving the income stream. Using a TFSA, you don’t need to worry about taxes at all.

Crunch that number

Once you have your number — in this example, $800,000 — you can work backwards to determine how much you’ll need to save. There are several calculators available on the internet that can help you with this math. They’re most commonly referred to as “future value calculators.”

These calculators typically have three variables. The first input is how much you’ve already saved that will go towards this goal. The second input is how much you’ll be contributing per year. The third input is how long this money will stay invested for. The last variable is that rate that you assume this money will grow at. I typically use a conservative 8% per year. Some advisors will suggest using a higher figure, but when it comes to retirement, it’s better to be safe than sorry.

The biggest numbers to play with are the duration and annual savings rate. Add a few years to your investing horizon and watch how quickly the compound interest adds up. Additionally, experiment with different savings rates to see which combination of numbers helps you reach your investing goal.

To reach $800,000 in savings, for example, you’d need to invest $6,000 per year for 31 years. That’s starting at $0, however. Run multiple scenarios to know how much wiggle room you have on any assumption. Without understanding this math, you’ll be investing with your eyes half shut.

Invest in long-term winners

Everyone wants to find the next big stock, but the most effective approach is to buy proven, long-term winners. Enbridge and Fairfax Financial Holdings, for example, have beaten the market for decades. Due to their structural competitive advantages, this outperformance could persist for decades more.

If you want to ensure your money compounds at the highest rate possible, you need to fill your portfolio with wealth-generating stocks that can deliver during all phases of retirement.

The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends FAIRFAX FINANCIAL HOLDINGS LTD. Fool contributor Ryan Vanzo has no position in any stocks mentioned. 

More on Dividend Stocks

hand stacks coins
Dividend Stocks

3 Top Dividend Stocks to Buy Today and Count On for Years

These top dividend stocks can maintain their current payouts and increase their distributions regardless of market downturns.

Read more »

buildings lined up in a row
Dividend Stocks

This 6% Dividend Giant Could Be the Perfect Retirement Partner

Discover how to achieve your ideal retirement. Plan ahead, invest wisely, and create multiple income sources for peace of mind.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Ready to Max Out Your TFSA? 2 Canadian Blue-Chip Stocks Offer Huge Growth

Two blue-chip Canadian stocks to power your TFSA with tax-free dividends and steady growth you can own for decades.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How I’d Structure a $21,000 TFSA for Constant Monthly Income

Catch up from a tough few years by building constant, tax-free monthly income in a $21,000 TFSA, anchored by diversification…

Read more »

gift is bigger than the other
Dividend Stocks

Seize These TSX Stocks Before the Holiday Surge

Air Canada (TSX:AC) could benefit from Holiday shopping.

Read more »

man shops in a drugstore
Dividend Stocks

GICs Are Done: This Dividend Stock Is a Much Better Income Option

As GIC yields sink, Richards Packaging offers higher income and potential upside, without abandoning the safety investors want.

Read more »

woman looks at iPhone
Dividend Stocks

Is TELUS Stock a Buy for Its 9% Dividend Yield?

Based on free cash flow, TELUS' dividend seems sustainable. It could be a multi-year turnaround idea for patient income investors.

Read more »

dividends grow over time
Dividend Stocks

2 Gargantuan Dividend Giants That Belong in Every Portfolio

Two TSX dividend giants that deliver paycheque-like income and steady growth, so you can set it and forget it for…

Read more »