Are you planning to retire on time? If you are still young and have plenty more years in you to stay in the workforce, you should start thinking about it now. A solid retirement plan looks at the big picture rather than a short-term outlook on finances. Buying and holding some of your investments in a Tax-Free Savings Account (TFSA) can be part of an excellent retirement plan.
The account lets you withdraw money held inside it without incurring taxes. Why? Because you’re paying into the account using after-tax dollars. This means any cash or other eligible investments held in the account can grow your account balance tax-free. If you aren’t already, you should be investing in a TFSA.
Today, I will discuss how much money you might need in your TFSA to enjoy an excellent quality of life in your golden years.
How much money should you have in a TFSA for retirement?
Right from the get-go, you must understand that there is never a one-size-fits-all solution when assessing exactly how much a person might need in their TFSA to retire. This question has a subjective answer that depends on tax rates, dependents, and living expenses. Despite each Canadian having unique requirements, you can get ballpark figures for the kind of TFSA income someone might need to retire.
To illustrate the examples, I will come up with two fictitious profiles: Tom and Jonathan.
Suppose Tom is a high-earning professional who primarily invests in dividend stocks like one of my favourites, Fortis (TSX:FTS). Since he invests in a TFSA, he doesn’t need to worry about taxes on the returns in his TFSA. Now, Tom’s annual household income after taxes is $250,000; he pays $5,000 per month in rent for their apartment, and his family’s overall expenses come up to around $160,000 per year.
In this case, Harry would ideally like to have around $4.5 million in his TFSA during retirement to maintain the same kind of lifestyle and expenses without getting worried. This is the kind of TFSA account balance you can have with disciplined and long-term investing.
Now, we have Jonathan, who is a single guy who doesn’t have family or other dependents. He just has to pay around $1,500 in rent; his total living costs add up to around $38,000 per year. For a comfortable retirement, Jonathan might need as much as $1.1 million in his TFSA to retire using the income from his investments.
Foolish takeaway
You cannot retire on a TFSA alone in 2026. You will need to realize substantial long-term gains, leverage dividend income, and unlock the power of compounding to accumulate enough wealth so you can live off of investment income during your golden years.
The only way that can happen is by making solid and well-informed long-term investments in your TFSA. Building up a well-balanced portfolio, saving diligently, and being disciplined as a stock market investor can help you make it work.
