Leveraging your retirement savings held in your Tax-Free Savings Account (TFSA) can help you generate greater returns for a bigger nest egg.
Today, I will present you with a hypothetical scenario where you begin with $100,000 and create a plan to retire according to your ideal timeline.
First, identify your monthly payouts
An average Canadian retiree needs around $3,500 per month to handle daily expenses. Let’s also suppose you are also utilizing your Canada Pension Plan (CPP) and Old Age Security (OAS) payments. In this case, you will get around $800 from the CPP and $700 from the OAS programs, respectively.
If you can build your TFSA portfolio to the point where it pays you upwards of $2,000 per month or $24,000 per year in passive income, you can consider retiring worry-free.
Next, create an investment timeline with approximate returns
Now, you need to create a table where you can calculate how much you must invest each year to achieve your goal. On the TSX, typical high-quality dividend stocks provide relatively safer returns, averaging a 6% dividend yield. You will need approximately $400,000 in your TFSA to earn $24,000 per year in passive income with a 6% yield.
To grow your retirement nest egg capital of $100,000 to $400,000, you can consider using a combination of growth stocks and dividend stocks to average 10% returns per year. Investing $1,000 per month to accelerate your wealth growth.
Two TSX stocks to average 10% annual returns
Ideally, you should diversify your $100,000 across several stocks to generate around 10% in average annual returns. Here are examples of a growth and dividend stock that can average such returns.
Descartes Systems Group (TSX: DSG) is an excellent growth stock with a compound annual growth rate (CAGR) of 15-20% in the last five years. The $9.49 billion market capitalization company headquartered in Waterloo provides supply chain management solutions to help its clients with logistics and trade. Any situation causing supply chain issues allows Descartes to sell its solutions.
As of this writing, DSG stock trades for $111.15 per share, and the mid-cap stock can grow its revenue by up to 15% per year. If you invested $10,000 in 2013, that would amount to a little over $100,000 in 2023. A stock generating less than half of the growth of DSG stock can convert $10,000 into $50,000 in about a decade.
For the dividend stock, consider BCE (TSX: BCE). As of this writing, the $50.66 billion market cap telecom giant pays out with a 7% dividend yield. The defensive and well-capitalized stock also increases its dividends at a 5% compound annual growth rate. With increasing investments in 5G technology and plenty of growth runway ahead, BCE is set to drive further growth, increasing shareholder value in the coming years.
If you invested $10,000 in BCE stock in 2013, it would amount to over $20,400, inclusive of dividends, giving 7% in average annual returns.
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Lastly, identify your retirement timeline
Suppose your $100,000 initial capital and $12,000 in annual investments generate 10% in returns after reinvestment, this is what the table can look like:
| Year | Annual Investment | Amount with 10% Return | Total Amount | Dividends at 7% |
| 2023 | $100,000 | $7,000 | ||
| 2024 | $12,000 | $10,000 | $122,000 | $8,540 |
| 2025 | $12,000 | $12,200 | $146,200 | $10,234 |
| 2026 | $12,000 | $14,620 | $172,820 | $12,097.40 |
| 2027 | $12,000 | $17,282 | $202,102 | $14,147.14 |
| 2028 | $12,000 | $20,210.20 | $234,312.20 | $23,431.22 |
| 2029 | $12,000 | $23,431.22 | $269,743.42 | $18,882.03 |
| 2030 | $12,000 | $26,974.342 | $308,717.76 | $21,610.24 |
| 2031 | $12,000 | $30,871.77 | $351,589.53 | $24,611.26 |
| 2032 | $12,000 | $35,158.95 | $398,748.48 | $27,912.39 |
Based on the example, your $100,000 can grow to almost $400,000 in around 10 years. At that point, your portfolio will generate around $27,912 per year. If you need $24,000 per year in passive income atop your CPP and OAS payments for your retirement plan, you can use a similar strategy to achieve that goal in less than a decade.
