It’s the million-dollar question that many prospective retirees are wondering: how much do you really need to have before you can finally leave the labour force without worry? Is the answer to that million-dollar question a million dollars? Or could rising inflation raise the bar on that figure? Of course, there’s really no single answer that’s going to please everybody.
Sure, $1 million might be good enough for some to sustain a retirement, but for a big spender with a fancy lifestyle and a taste for the finer things in life, perhaps more is needed before one can confidently mark a retirement date on their calendars. It’s a very personal question that depends on quite a few variables.
Most notably, how much risk are you willing to take on once you’re actually retired? Are you still willing to own stocks (preferably dividend payers) and the odd growth play? Or are you shifting gears towards a bond-heavy portfolio? Does the 60/40 mix still interest you? Or are you planning to double down on cash, guaranteed investment certificates (GICs), and money market funds?
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So, how much do you need in a TFSA to retire? Short answer: It depends.
Indeed, it’s nice to have safety and guarantees once you’ve finally retired. But depending on your goals, risk tolerance, lifestyle situation, and monthly cash flow statement, you’re probably not going to share the magic retirement figure with others. For some, it might be more about retiring earlier, even if it means not being able to have more than enough discretionary income to splurge without thinking about things too much.
If you’re fine with budgeting and you’re okay with a withdrawal rule (let’s say drawing down 4% of your portfolio per year or 1% every quarter) instead of focusing on dividend and interest payments, perhaps you might need less than you expect. Of course, drawing down could leave you in a tougher spot if you’re doing so in a bear market. In such a climate, you should be adding to stocks, rather than continuing to draw down. Either way, there really is no single figure that’s needed in your retirement or your TFSA.
If you’ve been making consistent contributions to your TFSA, you’ll be able to get a jolt from the power of tax-free compounding and dividends. And while there’s no single TFSA milestone you should target until you gain a better understanding of how much you’ll actually need (let’s not forget about other sources of income like pensions, CPP, OAS, and all the sort if you’re planning to retire at a more traditional age), I do think that investing with your TFSA in quality dividend stocks is the way to go.
Indeed, your TFSA could play a pivotal role in retirement as it generates income without taxes thrown in. That’s powerful.
The best income bet for a TFSA?
In terms of ideal ETFs, I like the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY), which I find to be better than the broader TSX Index. As it turns out, focusing on the largest dividend payers in the Canadian stock market hasn’t just been key to a fatter dividend payout; it’s also been a strategy that’s topped the TSX Index over time.
When you focus on the cash cows that are best positioned to raise their dividends, I do think there’s a lot of total return to be had as well. And, of course, a lower beta relative to the S&P 500. Either way, I like the big dividend payers (financials and energy specifically) and view most other smaller sectors of the Canadian market as better pursued via stock picking rather than going for a broader TSX ETF.
So, in short, the retirement amount in a TFSA and elsewhere is deeply personal, and it’s going to be different for everyone. For some, it’s $1 million, for others, it might be more or less, depending on the cash coming in and the cash flowing out. Either way, invest for the long-term and have a game plan for your TFSA.
