Man, I was looking through the Canada Revenue Agency (CRA) Tax-Free Savings Account (TFSA) statistics for the 2023 tax year, and the numbers are a bit dismal.
The table that stands out is Table 3A, which breaks down fair market value, contributions, and withdrawals by age group. For Canadians aged 65 to 69, the average TFSA balance comes in at just $51,244.
That is nowhere near enough to fund a retirement on its own. To be fair, most retirees are not relying solely on a TFSA. Many will have a Registered Retirement Savings Plan (RRSP), a workplace pension, or home equity built up over decades.
Still, it raises an interesting question. If you wanted to retire comfortably using only your TFSA, how much would you actually need? Here is a simple way to think about it with some back-of-the-napkin math.
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The passive income math
A common rule of thumb in retirement planning is the 4% rule. The idea is that you withdraw 4% of your portfolio in the first year of retirement, then adjust that amount for inflation each year. Historically, this has been a sustainable withdrawal rate over long periods.
If you were relying entirely on a TFSA, that math becomes straightforward. To generate $40,000 per year, you would need about $1,000,000 invested: $1,000,000 × 4% = $40,000
That might not sound like a huge income, but remember, this is completely tax-free. Depending on your tax bracket, $40,000 of TFSA income could be roughly equivalent to earning around $60,000 before tax.
For many Canadians, that is enough to cover essential expenses and still leave room for discretionary spending, assume the cost of living doesn’t increase dramatically over the next decade.
Why most investors will not get there
The reality is that building a $1,000,000 TFSA is not easy. The average balances we see from CRA data make that clear.
Getting there would require a long time horizon, consistent contributions, and disciplined investing. It also means sticking with a low-cost, diversified strategy and letting compounding do the heavy lifting.
Most importantly, it requires avoiding panic during market downturns. For those who do manage to reach that level though, the focus shifts from accumulation to income.
One option to consider is the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI). This ETF holds a portfolio of about 75 Canadian dividend-paying stocks and currently offers a trailing 12-month yield of 3.9%.
That is slightly below the 4% rule, but yields can fluctuate. As of March 31, the ETF delivered a strong 39.5% annualized total return over the past year. When prices rise quickly, yields tend to fall until dividend growth catches up or prices normalize.
Historically, this ETF has offered yields closer to 5% during different market conditions. It is also cost-effective, with a 0.22% management expense ratio, allowing more of the underlying income to flow through to investors.