Here's How Much Canadians Need in Their TFSA to Retire

Here’s How Much Canadians Need in Their TFSA to Retire

With one of the highest yields out there, this dividend stock could certainly help increase your TFSA and get you closer to retirement.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published December 12, 2024 4:50 pm EST

It’s a big question. How much do Canadians need in their Tax-Free Savings Account (TFSA) to retire right now? The answer is not set in stone. It depends on your lifestyle, retirement goals, and other sources of income. Financial experts often estimate that to retire comfortably in Canada, you’ll need around $1.7 million in total savings. This figure assumes you want to maintain a middle-class lifestyle without relying heavily on government support like the Canada Pension Plan (CPP) or Old Age Security (OAS). However, the number can be lower if you plan to downsize your home, move to a lower-cost area, or have other sources of income. Your TFSA, while incredibly powerful, is just one tool in your retirement toolbox.

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins — Source: Getty Images

Why a TFSA?

Let’s focus on the TFSA itself. Since its inception in 2009, it has become a favourite among Canadians for building tax-free wealth. By 2024, the cumulative contribution limit for those eligible since the beginning is $95,000. That’s a substantial amount to have invested and grow tax-free. The beauty of the TFSA is that all your gains, whether they come from dividends, capital appreciation, or interest, are tax-free when withdrawn. This makes it a great vehicle for retirement savings, particularly if you’ve already maxed out your Registered Retirement Savings Plan (RRSP) or prefer the flexibility of no withdrawal restrictions.

For those who feel they’re behind on their TFSA contributions, there’s good news. Unused contribution room carries forward indefinitely. If you didn’t contribute the maximum in any given year, you can catch up later. For instance, if you’ve only contributed $40,000 to your TFSA over the years, you’d still have $55,000 in contribution room available as of 2024. To catch up, focus on contributing any surplus cash when possible, such as tax refunds, bonuses, or savings from cutting unnecessary expenses.

Where to invest

Now, let’s talk about how Parex Resources (TSX:PXT) might be a smart addition to your TFSA to help you play catch-up. PXT is a Canadian oil and gas company with operations focused primarily in Colombia. Its fundamentals show promise for income-focused investors. With a forward annual dividend yield of 10.75%, PXT offers one of the highest yields among Canadian energy companies. This makes it an attractive option for TFSA investors looking to generate significant tax-free income.

Digging deeper into its financials, Parex’s recent performance has been mixed. In the third quarter (Q3) of 2024, the company reported funds flow from operations of $152 million. This represents a 4% decrease year over year. Similarly, quarterly earnings growth fell by 45%, and revenue declined by 18.1%. These figures suggest some challenges, likely due to fluctuating oil prices and operational costs. However, the company remains profitable, with net margins of 22.78% and a healthy return on equity of 13.81%. Its low debt levels, with a debt-to-equity ratio of just 1.84%, provide stability even during periods of market volatility.

Looking ahead, Parex Resources has set ambitious goals. It plans to spud three high-impact exploration wells and five near-field exploration targets in 2024, signalling a focus on long-term growth. Plus, the company has revised its production guidance upward to 49,500 barrels of oil equivalent per day for Q4 2024, reflecting confidence in its operational performance. Plus, it has a payout ratio of 44.34%. For investors aiming to grow their TFSAs, Parex appears undervalued compared to its peers.

But let’s not ignore the risks. Energy stocks like Parex can be volatile and heavily influenced by global oil prices, geopolitical events, and production challenges. The company’s recent drop in quarterly earnings and revenue growth highlights this uncertainty. While it may provide strong returns in a bullish market, it’s crucial to consider your risk tolerance before committing a large portion of your TFSA to Parex or similar stocks.

Bottom line

For Canadians playing catch-up on their TFSA contributions, a strategy combining high-yield stocks like Parex with other investments is a smart approach. Parex can provide a significant boost to income, but complementing it with less volatile investments ensures a balanced portfolio. Remember, the ultimate goal is to grow your TFSA consistently and sustainably over time, not chase short-term gains that could backfire.