TFSA Investors: Retire Rich by Investing Only $500 a Month!

Invest in your TFSA regularly and retire rich with a substantial stock portfolio and massive annual dividend income!

retirees and finances

Image source: Getty Images

The Tax-Free Savings Account (TFSA) is the government’s gift to Canadians who can invest in TFSAs for tax-free returns. Yes, Canadians should treat it as an investment account instead of a savings account.

Strategically investing only $500 a month (or $6,000 a year) in wonderful businesses via stock investing in your TFSA can allow you to retire rich!

The TFSA limit is growing

This year, the TFSA limit is $6,000. The yearly TFSA limit is indexed to inflation and rounded to the nearest $500. Based on the Bank of Canada’s long-term inflation target of 2%, the TFSA limit will increase to $6,500 in 2022 and increase to $7,000 in 2025.

Investors should get into the habit of investing the full contribution amount each year to maximize their TFSA returns. I find that saving and investing periodically is simply easier than contributing a big lump sum. But do whatever works for you.

Retire rich by investing $500 a month in your TFSA

If you’ve already started investing in your TFSA, that’s great. However, we’re going to be super conservative here and assume you’re just starting out with a $0 TFSA.

We also need to put in some reasonable parameters. Let’s say that the $500-per-month contribution is compounded annually with a portfolio yield of 5% and growing at 10% a year. You’d arrive at a portfolio value of $337,650 and would collect $16,882 of dividend income in year 19.

By now, you might be thinking that I tricked you, as $337,650 is not enough to retire on comfortably. Please, stick with me here. The above scenario will be markedly improved if you reinvested all the dividends.

You see, over that 19 years, you would have received cumulative dividend income of $123,007. Many beginner investors would laugh at the measly $330 of dividend income ($27.50 a month) in the first year and might even spend it.

Keep in mind that the compounding effect becomes stronger the longer you stay invested. The portfolio value difference between reinvesting dividends and not would be $10,285 by year five and $78,561 by year 10!

It follows that reinvesting all the dividends received over the 19 years would boost your portfolio value astoundingly to $1,184,461. On a 5% yield, you’d be getting annual income of $59,223 in year 19!

Some folks will continue to draw from their TFSA accounts if they’ve made that first withdrawal. Again, it’s about getting into the habit of reinvesting dividends.

Getting a 5% dividend yield today

There are more than several blue-chip dividend stocks that pay yields of at least 5%. Here’s to name a few that are also attractively priced today.

Brookfield Property Partners, Enbridge, and Bank of Nova Scotia yield 9.6%, 8.1%, and 6.3%, respectively.

The Foolish takeaway

Slow and steady wins the race. You don’t necessarily need to go out on a limb and take on excessive risk to aim for high returns of, say, 20% per year, but you could do so with a portion of your portfolio.

As the above numbers show, you can achieve a +$1,000,000 stock portfolio by just investing $500 a month. That said, it’s just one scenario. In reality, you won’t see your portfolio growing 10% every year. Your portfolio yield also won’t stick to 5%.

Moreover, imagine changing the scenario’s parameters a little, such as doubling your savings amount to $1,000 a month. You’d arrive at a portfolio value of $2,368,922 assuming the other parameters are the same. And of course, if there were no taxes.

Based on the current TFSA limit, however, you’ll need to invest the excess amount in other accounts. If you invest in a non-registered account, you’ll be paying some taxes on the dividends that’ll dampen the growth of your portfolio. Thankfully, eligible Canadian dividends are favourably taxed in non-registered accounts.

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 Kay Ng owns shares of Brookfield Property Partners, Enbridge, and The Bank of Nova Scotia. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends BANK OF NOVA SCOTIA and Brookfield Property Partners LP.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »