The account’s tax-free withdrawals make it a crucial tool for your retirement. Most retirement accounts and pensions are taxable, from the Canada Pension Plan (CPP) to the Registered Retirement Savings Plan (RRSP). And their withdrawals can affect your Old Age Security (OAS), which is available to people under a certain income limit. However, TFSA withdrawals do not affect OAS, making this your first choice for tax-free retirement income.
How much Canadians need in their TFSA to retire
Considering the maximum CPP and OAS you can get at age 65, you could earn the equivalent of $25,928 in 2025. The income with the lowest tax bracket is €57,375. The absolute numbers don’t help if you retire 10 years later. However, CPP and OAS can finance 34-45% of income in the low tax bracket. You must arrange the remaining 60-70% today so that it grows with inflation.
At this point, your TFSA, RRSP, and other income options should provide between $31,500 and $37,700 to cover the 70% shortfall in annual income of $57,000.
On average, you need your retirement investments to pay you $35,000 annually at current inflation. This $35,000 should grow 3 to 5% annually to adjust for inflation. Since most Canadian dividend stocks offer a 6% yield, a $584,000 portfolio could generate $35,000 in annual dividend income.
This $584,000 can be split equally between a TFSA, RRSP, and a private pension. It means you need at least $195,000 in a TFSA balance that grows with inflation to retire.
But what if you don’t have $195,000 in your TFSA in 2025?
The highest average TFSA balance of $72,000 is just 37% of what is needed for retirement. You need stocks that can bridge this gap and also beat inflation by boosting returns.
The iShares S&P/TSX Capped Information Tech Idx ETF (TSX:XIT) has a 10-year compound annual growth rate (CAGR) of just over 20%. So if you invested $10,000 10 years ago, it’s now worth $63,770. To adjust for 5% inflation, the $10,000 amount would have to have grown to $16,300. Still, the ETF’s value has nearly quadrupled, helping you close the gap and get closer to the TFSA target.
The XIT tech ETF can continue to deliver strong double-digit returns as it stands to benefit from the artificial intelligence (AI) revolution, e-commerce and other technology adoptions.
Like the XIT ETF, there are resilient growth stocks such as Shopify, and seasonal shares such as Air Canada which can help you generate 25-30% returns when you buy them during the March dip and sell during the seasonal peak of February and July respectively.
Compounding using dividend growth stocks
Another way to achieve the $195,000 inflation-adjusted TFSA portfolio is with dividend growth stocks, such as Canadian natural resources (TSX:CNQ), and reinvest their dividends in growth stocks. This oil and gas supplier has a cost advantage and includes the dividend amount in its costs. Its 25-year history of dividend growth at a CAGR of 21% ensures that it can continue paying dividends for years to come.
With an investment of $10,000 in January 2016, you would have purchased 667 shares, which are now worth $29,788. Dividend income from these stocks has grown from $313 in 2016 to $1,567 in 2025. The cumulative dividend over 10 years is over $8,600. If you reinvest this dividend, this money will also earn returns and help you reach your TFSA portfolio value goal.
Takeaway for investors
Saving your work income is not enough. You have to put your money to work. When both you and your money are working, there comes a time when you can live on the money that works for you.
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