The 21st century brought many challenges and comforts of its own. The baby boomer generation enjoyed defined-benefit pensions where they knew how much they will get as a payout. But the 2009 financial crisis changed it all. The companies and governments shifted to defined-contribution pensions, where the only thing certain is your contribution amount.
While you can make an estimate, you don’t know till the end how much you will get in pension. During the 2009 crisis, the Canada Revenue Agency (CRA) started Tax-Free Savings Account (TFSA) to equip Canadians with a strong tool to start their savings.
TFSA pension: Your road to early retirement
Living in uncertainty hampers peace of mind. You never know what sweeping changes another major economic crisis could bring to the existing government benefits. It’s better to take control of your finances.
Those who were in their 20s back in 2009 and used the TFSA properly can retire when they turn 40. TFSAs allow you to invest in U.S. stocks, invest in growth stocks as you’ll be deducted a 30% withholding tax on U.S. stock dividends.
The last decade saw the surge of technology. The 2010-2018 period was the era that made NASDAQ what it is today. For instance, Angela has turned 35 this year. Back in 2010, she was bullish on technology but was confused about which stock to buy. Hence, she invested $10,000 in the Invesco QQQ Trust Series 1 ETF (NASDAQ:QQQ) in January 2010. After that, she invested $1,000 every year in the ETF.
The ETF replicates the Nasdaq 100 index, which includes the top 100 companies trading on Nasdaq, including the trillion-dollar stocks of Apple, Amazon, Google, and Microsoft. The TFSA gives you the tax benefit on capital appreciation. The ETF surged more than six times in the past decade.
Her $21,000 ($10,000 initial investment plus another $11,000 from yearly investments) became $103,000. She earned $82,000 from her TFSA investment, and the CRA won’t tax her on this money. For ease of calculation, I remove dividends and foreign currency gains.
Angela invested another $3,000 every year in Constellation Software. Her $33,000 contribution earned her $360,000 in TFSA income in these 11 years.
How to convert your TFSA wealth into $70/day in pension income?
Angela’s bet on tech stocks paid off. In the 11 years from January 2010 to 2020, she invested $54,000 and earned $442,000 in investment income. She now has around half a million in her TFSA, which the CRA can’t touch. The COVID-19 pandemic has created a once-in-a-decade opportunity to lock in high dividend yields.
Stocks of dividend aristocrats like SmartCentres REIT, RioCan REIT, and Enbridge (TSX:ENB)(NYSE:ENB) plunged 30%-40% this year, increasing their dividend yield to 7.5%-8%.
Angela grabbed this opportunity and took out $300,000 from her tech stocks and distributed it equally between the three dividend stocks. Her $300,000 investment will fetch her dividend income of $64/day.
Among the three stocks, Enbridge has a reputation for giving incremental dividends. In the last 10 years, it has increased its dividend per share at a compound annual growth rate (CAGR) of 14%. Taking a cautious estimate, if Enbridge continues to grow its dividend per share at a CAGR of 8%, Angela’s dividend income will increase to $74.5/day by 2025 when she turns 40.
You can start now and retire on a tax-free pension
If you haven’t yet started investing, you can start now and retire peacefully in 20 years only by investing in TFSA. Now the CRA requires you to contribute to TFSA at the start of the year. Save $100 a week. This money will accumulate to $5,200 in a year. Invest this money on the stocks you are bullish.
The pandemic has accelerated the move to digitization. And the 5G and artificial intelligence (AI) revolution will only strengthen the digital world. The QQQ ETF has the potential to replicate the last decade’s growth in the 2030 decade.
As Warren Buffett says, invest in a stock that you would want to hold for 10 years. Enjoy the first 10 years in high-growth stocks and the next 10 years in dividend stocks.
