TFSA: How to Create $500 in Income Each Month for Retirement

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Written by Andrew Button at The Motley Fool Canada

Do you want to get $500 worth of passive income each and every month in your Tax-Free Savings Account (TFSA)?

It’s a worthy goal, and you might even be able to pull it off if you save and invest diligently. In 2024, an additional $7,000 worth of TFSA contribution room will be added. If you were 18 or older in 2009, that will bring your cumulative TFSA contribution room to $95,000. That’s enough money to produce $6,000 per year — or $5,000 per month — in passive income, which is all tax free inside of a TFSA.

In this article, I will explore how you can attain $500 per month or more in tax-free TFSA income.

Guaranteed Investment Certificates

Guaranteed Investment Certificates (GICs) are among the safest and easiest investments you can make. You don’t even need a brokerage account to buy one; you simply request one from your bank. A GIC is much like a savings account, only with higher interest. In exchange for receiving higher interest, though, you have to agree not to withdraw the money until a certain specified date (the maturity date).

An easy way to get to $500 per month with GICs is to invest $10,000 a month into 5%-yielding GICs. A year from your start date, you will get $10,500 paid back to you each month. A similar strategy is to invest $100,000 across a collection of money market funds with different payment dates, so you get a payout close to $500 each and every month.

Index funds

Another way to get $500 in passive income each month is to invest in broad market index funds. This method takes the greatest amount of savings — the indexes generally don’t have very high dividend yields — but it’s also safer than some of the other methods you can try.

Consider iShares S&P/TSX 60 Index Fund (TSX:XIU), for example. It’s a Canadian index fund that tracks the TSX 60 — the 60 largest publicly traded Canadian companies by market cap. The index has about a 3% dividend yield. So, if you invest $200,000 into it, you will get roughly $6,000 in dividend income each year, which averages out to $500 per month.

This particular fund pays quarterly rather than monthly, but there are monthly pay dividend stocks out there as well. In the next section, I’ll explore one of them.

Individual stocks

Individual stocks are perhaps the most promising assets for creating passive income, if you’re willing to assume a little extra risk. Such stocks sometimes have high yields, but since they represent ownership stakes in individual companies, they also have highly concentrated risk profiles.

Consider Northwest Healthcare Properties REIT (TSX:NWH.UN), for example. It’s a Canadian REIT that leases out healthcare office space across Canada, the U.S., and Europe. Its clients are mainly government-run health insurance systems, which usually have great ability to pay, being backed by government spending power.

NWH’s buildings in Europe have a 98% occupancy rate, and the portfolio as a whole has a 97% occupancy rate. The portfolio has minimal tenant turnover. The units pay a $0.03 dividend every month, which works out to $0.36 per year. At today’s stock price of $4.21, NWH.UN has an 8.55% dividend yield. At that yield, you need to invest only $70,175 to get a $500 monthly cash flow going.

The post TFSA: How to Create $500 in Income Each Month for Retirement appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has positions in iShares S&p/tsx 60 Index ETF. The Motley Fool recommends NorthWest Healthcare Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.