Planning for your retirement can be quite challenging. You need to factor in how long you will live and how you will spend the best years of your life. One of the first things you need to determine is how much you need to save up for your retirement nest egg. $1 million sounds like a lot of money for many people. Some would settle for less, but it’s okay to dream, right?
What if I told you that retiring as a millionaire is possible? If you want to retire with a $1 million nest egg, you should know that it is not going to be easy. It requires improving your spending habits, discipline, and a lot of patience. Let’s take a look at what the plan can look like.
Increase your savings
Begin saving a lot more than you already do to become a millionaire. The younger you start, the better your chances can be of retiring rich. You might already be saving money, but there are always areas where you can improve to increase your savings rate.
Consider auditing your monthly spending for a few months besides any irregular costs. It can give you a good idea of how you spend your income and how much you save. Check for any unnecessary expenses that you can cut. If you’ve lost income due to COVID-19 and are relying on CERB, you might already have taken your spending down a notch.
Carry on the habit of spending less and saving more. The money you set aside can be very handy to help you become a wealthy retiree.
Use a TFSA
The Tax-Free Savings Account (TFSA) is a blessing for Canadians. Designed to encourage Canadians to save more, the TFSA allows you to hold cash or equivalent assets to a certain limit. Any income or profits from assets stored in your TFSA do not count as part of your taxable income.
The government has increased the maximum contribution limit for TFSAs each year since it introduced the account type. With the 2020 update, the maximum amount you can contribute to your TFSA stands at $69,500. Using the TFSA contribution room to hold cash can allow you to earn interest income, but it will be too meagre to help you achieve your financial goals.
You need to invest in dividend-paying stocks if you want to hit the golden seven-figure mark.
Invest early
The earlier you begin investing, the better your chances for accumulating enough funds to retire a millionaire. If you use the contribution room in your TFSA to invest in a portfolio of dividend-paying stocks and you reinvest your dividend income, you can substantially boost your overall wealth by the time you retire. You need to invest in a stock that can offer you reliable dividend payouts in the long run.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is an excellent stock that you can consider to this end. It is one of Canada’s oldest financial institutions with a lengthy track record of paying its shareholders their dividends without fail. The bank has managed to deliver dividends to investors through challenging financial circumstances in the past, and it can continue to pay investors through the current crisis.
The bank is a favourite long-term investment for its shareholders. Investing in a stock like this can help you become a millionaire investor through your TFSA. I will describe a hypothetical scenario to help you understand how it can work.
Let’s suppose you max out your TFSA contribution room with $69,500 worth of TD stock. The bank’s compound annual growth rate (CAGR) for the last 10 years is 9.24%. If you leave the $69,500 worth of TD shares and keep reinvesting the dividend income for 31 years in your TFSA, that $69,500 can turn into approximately $1,076,000. Of course, you should never allocate all your contribution room to one stock. Always diversify your portfolio.
Foolish takeaway
Retiring with $1 million is easier said than done. You need a diverse portfolio of stocks in your TFSA, and you need to account for various factors that can change during that time. However, it is theoretically possible to accumulate the funds. TD is an ideal stock that I think could be a part of your millionaire portfolio.
