The Tax-Free Savings Account (TFSA) has quickly become a valuable tool for Canadians since its inception in 2009. The tax-sheltered status of the account means it can be part of an excellent retirement plan to build a secondary nest egg to fund your golden years.
Many Canadians wonder how much money they should have in a TFSA to retire. Honestly, there is no set amount that will work for everyone. Thinking in terms of how much you should have in a TFSA in exact number figures never works because everyone has different lifestyles and expenses. Instead, you should focus on having enough to generate enough meaningful tax-free income throughout your retirement.
The exact amount you need depends on your lifestyle, expected expenses, and how much you generate from other sources in retirement. That said, one thing applies universally to all Canadians planning their retirement: The larger your TFSA, the more financial freedom you can enjoy in the best years of your life.
While it is called a savings account, I think the TFSA is more of an investment vehicle that you can use to grow the value of investments held in the account without incurring taxes. The returns from qualifying holdings in your account, whether from interest, dividends, or capital gains, can grow your account tax-free. Since withdrawals are also tax-free, you can count on each dollar generated in the account to go directly toward your retirement.
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How large should a TFSA be?
There will never be an arbitrary amount or account balance that you can call enough. Focusing on retirement income instead can paint a clearer picture in terms of how to use the contribution room in your TFSA.
First, you should estimate the recurring expenses and determine how much of those will be covered by any government benefits, workplace pensions, rental income, Registered Retirement Savings Plans (RRSPs), and other investments.
The goal is to build a self-directed passive income stream in your TFSA that can help you at least cover the gap and generate enough to fulfill other needs you might have. Since you invest using after-tax dollars, withdrawals from your TFSA do not incur taxes or contribute to taxable income calculations. This way of using your TFSA can significantly reduce your financial stress and keep you from moving to a higher tax bracket while fulfilling your needs.
Building a retirement-focused TFSA
Building a self-directed TFSA that can generate enough returns to fund your retirement takes a long time and consistent contributions. While every investor must choose investments aligning with their risk tolerance and goals, the stock market has historically delivered some of the best returns among the asset classes you can invest and hold in a TFSA.
Focusing on creating a portfolio of high-quality TSX stocks with attractive income and solid long-term growth prospects can be an excellent way to begin building such a portfolio. To this end, Brookfield Corporation (TSX: BN) stock can be a good starting place.
Brookfield is a $151.9 billion market-cap alternative asset manager and conglomerate that has diversified into virtually every sector of the economy. The global alternative asset manager earns profits through asset management fees, the ownership of tangible assets, insurance operations, and wealth solutions.
The management at Brookfield consistently targets high returns for shareholders, and that shows in its performance. Over the last 10 years, Brookfield has generated roughly 16% in annualized returns to its investors. Besides its growth potential, the stock has increased its quarterly dividends for over a decade.
Foolish takeaway
As of this writing, Brookfield stock trades for $61.98 per share and pays US$0.07 per quarter, translating to a meager 0.63% dividend yield. However, its dividend growth in the last 10 years has been 9.8%, which is more meaningful in the long run as you leverage compounded growth in a TFSA.
I think BN stock can be an excellent foundation for a well-balanced and income-focused TFSA portfolio for retirement.
