The TFSA Balance You’ll Probably Need to Retire Well in Canada

These two TSX dividend stocks can be excellent picks to ensure your self-directed TFSA portfolio is ready to fund a more comfortable retirement.

Key Points
  • The TFSA lets after‑tax contributions grow tax‑free and be withdrawn tax‑free, making it a powerful vehicle for decades‑long compounding and retirement saving.
  • A retirement‑ready TFSA is about asset allocation and high‑quality holdings, not just a big balance—diversified, low‑risk dividend stocks outperform a large stake in volatile names.
  • Consider dividend stalwarts as TFSA foundations—Bank of Montreal (TSX:BMO, ~$245.30, ~2.79% yield) and Fortis (TSX:FTS, ~$79.33, ~3.23% yield) (with Enbridge as another solid option) for predictable income and long‑term compounding.

The Tax-Free Savings Account (TFSA) is more than what its name might suggest. The account was introduced in 2009 to encourage Canadians to improve their savings practices. However, the tax-sheltered status of the account and the flexibility it offers make many consider it an investment vehicle.

Contributions you make to the account are with after-tax dollars, and the returns from qualifying investments held in your account can grow your account balance without incurring taxes. To make it even better, you will not get taxed for withdrawals. These qualities make it possible to use the TFSA as part of a solid retirement plan.

All you need is to make the right investments that you can hold for decades and reinvest dividends to unlock the power of compounding to accelerate your wealth growth.

Retirees sip their morning coffee outside.

Source: Getty Images

The ideal TFSA balance for retirement

There’s no one-size-fits-all solution for the ideal TFSA balance for retirement. The more you can accumulate, the better. However, a TFSA portfolio that’s retirement-ready requires careful capital allocation rather than merely a large balance. $500,000 in high-risk stocks will not be the same as the same amount invested in a portfolio of diversified high-quality dividend stocks.

This is why focusing more on the right investments instead of a massive balance is a better approach.

Low-risk dividend stocks

Building a well-balanced portfolio of high-quality dividend stocks can take time. Bank of Montreal (TSX: BMO) stock and Fortis (TSX: FTS) are two of the top picks I would consider as foundations for a retirement-focused TFSA portfolio.

BMO is one of the oldest banks in Canada, and it has paid investors quarterly distributions for almost two centuries. This means the bank has paid out to investors amid multiple global conflicts, economic crises, and pandemics. It engages in providing various financial services in Canada and the U.S., which means that investors can capitalize on the performance of a reputable financial institution to secure long-term capital appreciation and dividends.

As of this writing, BMO stock trades for $245.30 per share and pays investors $1.71 per share each quarter, translating to a 2.79% annualized dividend yield. Investing in its shares and reinvesting to buy more shares can help you compound the meagre returns into a substantial amount by retirement.

Fortis is another top pick for Canadians with a long investment horizon. The $40.39 billion market-cap utility holdings company owns and operates several utility businesses across Canada, the U.S., and the Caribbean. It is a pure-play on the utilities sector that might make the stock boring in terms of capital appreciation. However, the stock makes up for that with growing dividends.

Fortis has increased its dividends for over 50 years, supported by its resilient and defensive business model. Since most of its revenue comes from long-term-contracted assets in rate-regulated markets, it has predictable cash flows that it can use to fund capital programs and dividend hikes.

As of this writing, it trades for $79.33 per share and pays investors $0.64 per share, boasting a 3.23% dividend yield.

Foolish takeaway

A comfortable retirement means having the money to cover necessities and your lifestyle. The income generated by your TFSA can complement the retirement income from pensions like the Canada Pension Plan and Old Age Security benefits. To this end, Fortis stock and Enbridge stock can be excellent foundations for a well-balanced retirement portfolio.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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