Introduced in 2009, the Tax-Free Savings Account (TFSA) is one of the best savings accounts available to Canadians. For those who know that it works better as an investment vehicle, it is arguably one of the best tools you can use to plan a comfortable retirement in Canada. However, one of the most frequent questions of someone using the account for retirement planning is: How much do I need to have in my TFSA to retire?
The short answer is that the answer will be different for each investor. Considering that every individual has different needs, retirement spending, housing costs, pensions, and other factors, there is no one-size-fits-all solution here. If we speak of ballpark figures to set a rough benchmark, $500,000 could be a decent target to aim for as an investor. If you have decades left to invest, it can be a good target to set, and such a balance in a TFSA, when invested wisely, can make your account a tax-free, income-producing account.
Canadians already have the Canada Pension Plan (CPP), Old Age Security (OAS) benefits, and the Registered Retirement Savings Plan (RRSP) accounts to rely on, but these tools are designed to partially cover potential retirement expenses. Supplemented by tax-free returns from a TFSA, you could be looking at a solid retirement plan that lets you make the most of your golden years.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is one of the best picks to consider if you seek a long-term income-generating investment for your TFSA. It is one of Canada’s big bank stocks, generating recurring earnings from banking operations. It has a sizeable domestic operation and a growing presence in the international market. While any of Canada’s Big Six Banks qualify here, Scotiabank’s growing shift toward North America makes it more attractive in my books.
Scotiabank has a strategic presence across the Latin American banking sector that boasts immense long-term growth potential. Its current focus on Canada, the US, and Mexico can help it leverage the growth of these markets until its Latin American segment can pick up pace.
Scotiabank stock trades for $123.55 per share at the time of writing and pays investors $1.14 per share each quarter, translating to a 3.7% dividend yield that you can lock into your portfolio today.
Fortis
Fortis Inc. (TSX:FTS) is one of the best Canadian utility stocks and my favourite pick for long-term dividend growth. The $39.5 billion market cap Canadian utility holdings company owns and operates several natural gas and electric utility businesses across Canada, the US, and the Caribbean. Most of the company’s revenue comes from long-term contracted assets in rate-regulated markets. This means predictable and reliable cash flows backed by strong demand.
The clear earnings visibility over the years, thanks to its business model, has allowed Fortis to fund capital programs and increase dividends comfortably. With its latest dividend hike, Fortis boasts an over 50-year dividend-growth streak. The essential nature of its services means it can continue funding dividend growth for decades like it already has.
As of this writing, Fortis stock trades for $77.23 per share and pays $0.64 per share each quarter, translating to a 3.3% dividend yield.
Foolish takeaway
Suppose you can build a $500,000 self-directed portfolio of dividend stocks. At a 4% withdrawal rate, the account can generate around $20,000 per year, translating to over $1,660 in tax-free monthly income. The income remains tax-free due to the fact that TFSA contributions are made with after-tax dollars. Consistently reinvesting your dividends to compound growth can accelerate your wealth generation and get you closer to your goal of a comfortable retirement. To this end, Fortis stock and Scotiabank stock can be excellent anchors for your self-directed TFSA portfolio.
