It is every person’s dream to set aside enough cash by the time they retire, so they can comfortably live out their golden years. The exact sum any individual might consider enough for their retirement years can vary depending on their lifestyle. Let’s consider $500,000 as a nice round figure for a retirement nest egg.
There is a possibility that you can generate $500,000 for your nest egg in as little as 25 years. It takes a lot of hard work, financial discipline, and patience, but you can achieve such a portfolio. I will discuss how you can utilize your Tax-Free Savings Account (TFSA) to create this much wealth.
Using the TFSA for more than just cash
The TFSA has a contribution room that the government has been increasing each year since the account type was introduced. After the 2020 update adding a $6,000 contribution room, the total assets you can hold is $69,500.
The name suggests that the TFSA is a mere savings account. However, you can use it to store more than just cash. You can allocate the contribution room in your account to cash or assets that amount to the maximum contribution room’s cash equivalent. Any asset you store in your TFSA can grow tax-free, and you can withdraw the amount without incurring penalties or withdrawal fees.
While you can use the TFSA to store and grow cash, you would make better use of the account by investing in stocks that can provide you with reliable long-term income. When you store an asset within the account, it can grow without affecting your contribution room each year. The $69,500 contribution room can become worth a lot more if you use it wisely.
Invest in dividend-paying stocks
Investing in a dividend stock instead of using the TFSA to store cash can entitle you to substantial wealth growth. When you hold a dividend stock in your TFSA, it can grow through capital gains without incurring taxes. A dividend stock can also add cash to your TFSA through the company’s payouts to its shareholders. You can unlock the power of compounding to reinvest the dividends into the stock and accelerate your wealth growth.
A stock to consider
I will always suggest maximizing the contribution room in your TFSA. You can use it to hold a diversified portfolio of dividend stocks to generate a substantial income over a few decades. One stock that could help you achieve a $500,000 nest egg is Toronto-Dominion Bank (TSX:TD)(NYSE:TD).
The bank is widely considered one of the safest long-term investments in Canada. It is a financial institution that relies heavily on its retail banking operations, and it also enjoys excellent exposure to U.S. retail operations. The economic challenges created by the pandemic are putting pressure on TD and other major banks. However, TD has survived far worse over the centuries and has remained profitable for its shareholders.
A $20,000 investment in TD just 25 years ago could be worth more than $500,000 if you reinvested the dividend payouts back into the stock. While the past performance does not predict its future performance, it can provide you with an example of what you can expect.
Using your TFSA to hold top dividend stocks and use distributions to acquire more shares can help you achieve financial freedom faster. The best strategy is to reinvest your dividends automatically. You will not even need to monitor the payouts and manually reinvest dividends. I think Toronto-Dominion is an ideal stock to begin building a $500,000 TFSA portfolio for your retirement.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned.