I hear you sigh!
It’s entirely possible for those who have life ahead of them. An 18-year-old saver now has 47 years to reach the magic number before retirement. But tell me, what will he be able to afford with a million, in 2071? That will amount to just under $400,000 in 2024, best case scenario.
But on a less distant horizon, is this feasible? In any case, it is a fantasy that is winning over many minds, especially young people.
I didn’t dream it, I read somewhere that it was a trendy topic within a certain clique, which led me to Google “TFSA millionaire” (TFSA is the English acronym for CELI)… Articles and videos to no end, most offering recipes to cross the seven-figure threshold. There is even a site called “TFSA millionaire”. I also saw a book. A book! Imagine the abundant literature if Americans also had access to that, the TFSA.
There is indeed something to fantasize about with our modern eyes. A TFSA of one million which would produce a 4% return net of fees would offer its holder $40,000 in income per year, without being bothered by the tax authorities, while leaving the capital intact. The retiree who had nothing else would be classified among the elderly at the lowest end of the scale, which would ironically open the door to assistance programs reserved for the most deprived.
Tax-free income is magical!
What makes the challenge particularly difficult for someone who is 10 or 15 years away from leaving the workforce is the lack of time. Since the TFSA has only existed since 2009, a person who would celebrate their 55th birthday this year has only had access to it since the age of 40. He missed 22 years of contributions, if we compare him to the one who was 18 years old in 2009 (33 years old today).
It is said that there are skillful investors whose TFSAs have already reached half a million dollars, if not more. When I check with people I know in the investment industry, it’s like we’re talking about albino zebras. They answer that there are some, without ever having seen a specimen.
Returns around 19%, year after year, for 15 years, is what would have been necessary to hold half a million in TFSAs today. Extremely rare, such gains are most often due to luck, and generally they deflate quite quickly. If chance plays a minor role, we must then suspect the work of a gifted and relentless investor, which is not without attracting the attention of the tax authorities. Professional activities cannot be carried out within a TFSA with a view to making a profit, and the line between this type of operation and compliant transactions is not always clear.
The accumulated contribution room for a TFSA currently stands at $95,000. I would like to remind you that the tax-free account has not always been perceived as the powerful investment tool that we see it today. When the space was only $10,000, we mainly considered the TFSA as a place to save at 2% interest in order to finance more or less short-term projects.
It was over time that we realized the potential of the TFSA, as its capacity grew. In 2009, no one said to themselves: “Oh, what a great thing to become a millionaire!” Especially since we were emerging from the financial crisis, burned like never before by the stock market. What I want to emphasize is that those who managed to give their TFSA a respectable size did so despite a hesitant start.
A big TFSA, currently, how do you recognize it? Someone who managed to touch the $200,000 plateau deserves our admiration! In addition to contributing the maximum each year, a 9% return was essential to reach this level. The financial advisors I spoke with have seen TFSAs like this quite often, even if they are not the norm.
Continuing on this path, which would be improbable, a 55-year-old person would find themselves with a TFSA of $600,000 when they retire in 2034. For that year, their contribution room would be $8,500. $, if we assume an inflation rate of 2.1%.
When I tell you that it’s too late for you to aim for the million. And for me… (That said, the age of 65 is just a benchmark. There is no age limit for contributing to the TFSA.)
What if it was the 33-year-old investor who had accumulated $200,000 so far, thanks to discipline and stellar returns? He could put it in a house, obviously. But keeping the pace, how much money will he be sitting on at age 65, do you think?
Four and a half million. Non-taxable.
Okay, contributing the maximum each year while hoping to maintain 9% returns is really called fantasizing. An advisor who promised such results would deserve to be denounced.
But let’s assume that our young investor has always maximized his TFSA, the aspect over which he has the most control, what performance should he aim for to realize his fantasy. Annual gains of 4%, net of fees, would be enough to cross the million mark.
But what will a million be worth when you get there? Who cares, it will still be useful.
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