How to Build Your Own Pension With a TFSA

Proper planning, plus a little math, can help you retire easy with a private pension that leverages long-term winners like Enbridge Inc. (TSX:ENB)(NYSE:ENB) and Fairfax Financial Holdings Ltd (TSX:FFH).

| More on:

If you’re lucky enough to have a pension, then congratulations. Having a pension is a huge advantage during retirement. Still, everyone can use a backup plan in the form of their own capital. If you don’t have a pension, this is even more important.

It’s important to know that you can build your own private pension through proper planning. Whether you want a pension that delivers $10,000 or $100,000 per year is up to you, but everything helps when you’re trying to avoid outliving your money.

How do you create your own pension? All it takes is three simple steps.

Find your number

The first step is to figure out how big you’d like your pension to be. Be realistic with this. Should it be supplementary or comprehensive? Don’t worry about how much you need to save; that math is easy. Simply determine how much you’d like your pension to deliver on an annual basis.

Let’s assume you’d like an annual pension of $40,000. Simply multiply that amount by 20 to determine how much you need to save. In this case, it would be $800,000. Multiplying by 20 assumes a 5% withdrawal rate. That figure helps account for additional growth, inflation, and market volatility, plus a small cushion to avoid outliving the income stream. Using a TFSA, you don’t need to worry about taxes at all.

Crunch that number

Once you have your number — in this example, $800,000 — you can work backwards to determine how much you’ll need to save. There are several calculators available on the internet that can help you with this math. They’re most commonly referred to as “future value calculators.”

These calculators typically have three variables. The first input is how much you’ve already saved that will go towards this goal. The second input is how much you’ll be contributing per year. The third input is how long this money will stay invested for. The last variable is that rate that you assume this money will grow at. I typically use a conservative 8% per year. Some advisors will suggest using a higher figure, but when it comes to retirement, it’s better to be safe than sorry.

The biggest numbers to play with are the duration and annual savings rate. Add a few years to your investing horizon and watch how quickly the compound interest adds up. Additionally, experiment with different savings rates to see which combination of numbers helps you reach your investing goal.

To reach $800,000 in savings, for example, you’d need to invest $6,000 per year for 31 years. That’s starting at $0, however. Run multiple scenarios to know how much wiggle room you have on any assumption. Without understanding this math, you’ll be investing with your eyes half shut.

Invest in long-term winners

Everyone wants to find the next big stock, but the most effective approach is to buy proven, long-term winners. Enbridge and Fairfax Financial Holdings, for example, have beaten the market for decades. Due to their structural competitive advantages, this outperformance could persist for decades more.

If you want to ensure your money compounds at the highest rate possible, you need to fill your portfolio with wealth-generating stocks that can deliver during all phases of retirement.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends FAIRFAX FINANCIAL HOLDINGS LTD. Fool contributor Ryan Vanzo has no position in any stocks mentioned. 

More on Dividend Stocks

clock time
Dividend Stocks

Time to Buy This Canadian Stock That Hasn’t Been This Cheap in Years

This dividend stock may be down, but certainly do not count it out, especially as it holds a place in…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Is Brookfield Infrastructure Stock a Buy for its 5% Dividend Yield?

Brookfield Infrastructure's 5% yield is attractive, but it's just the tip of the iceberg for why it's one of the…

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

Buy 4,167 Shares of 1 Dividend Stock, Create $325/Month in Passive Income

This dividend stock has one strong outlook. Right now could be the best time to grab it while it offers…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

4 Passive Income ETFs to Buy and Hold Forever

These 4 funds are ideal for long-term investors seeking to simplify the process of investing in high-quality, dividend-paying companies while…

Read more »

sale discount best price
Dividend Stocks

2 Delectable Dividend Stocks Down up to 17% to Buy Immediately

These two dividend stocks may be down, but each are making some strong changes for today's investor.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

2 Top Canadian Dividend Stocks to Buy on a Pullback

These stocks deserve to be on your radar today.

Read more »

ways to boost income
Dividend Stocks

This 10.18% Dividend Stock Is My Pick for Immediate Income

This dividend stock offers an impressive dividend yield, but is that enough for investors to consider long term?

Read more »

Confused person shrugging
Dividend Stocks

Telus: Buy, Sell, or Hold in 2025?

Telus is down 20% in the past year. Is the stock now undervalued?

Read more »