Becoming a TFSA Millionaire: Creating Generational Wealth with a Small Monthly Investment

Imagine if you could transform a small monthly investment of $500 into a million-dollar nest egg for your retirement. Sounds unbelievable, right? Yet, that's exactly what we're exploring in this episode, where we delve into the world of Tax-Free Savings Account (TFSA) investing and the incredible potential it holds. We discuss why the million-dollar mark is not just a psychological goal, but one that potentially offers substantial retirement income, significant tax savings, and the ability to pass on wealth to future generations—tax-free.

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Chapters

• 0:09 Becoming a TFSA Millionaire
• 9:04 Building Generational Wealth With TFSA

Transcript

Speaker 1: 0:09

Hello and welcome back to the Canadian Money Roadmap podcast. I'm your host, evan Newfield. Today's episode we are going to take a look to see if it's actually possible to become a TFSA millionaire. Let's back up a little bit before we even consider the how and how long it will take. Why would you even want to do that? Well, first of all, I want to create content that people actually want to listen to. Many studies show that this number of a million bucks is something that most people anchor that figure to the amount that they think they need to retire, the amount they feel they need to have to feel wealthy, the feel they need to have before they can be generous with others, all these other things. That million dollar figure really looms large over people's psychology, and so, yeah, I'm going to be a little bit click baity with the title and the concept of this episode, but I want to walk through this idea for that reason specifically. Another reason why you might actually want to do this, regardless of it just being a catchy number, a nice round number, is that if you had a million bucks in your TFSA say, I'm speaking to someone who's 18 years old right now and you had a million bucks in your TFSA later on in life. That would provide a pretty significant retirement income In addition to the other sources of income you're very likely to have, especially those like your government benefits, like old age security and the Canada pension plan. We're very fortunate here in Canada to have programs like that that are funded in a much more sustainable way than those of our counterparts down in the United States and other parts around the world as well. I'd like to do some more episodes coming up in the future about government pensions and how these are numbers that we can really rely on, but in addition to those, I wanted to talk today, of course, about tax-free savings accounts and building those up. Another reason why you'd want to potentially have a goal of becoming a TFSA millionaire is the hundreds of thousands of dollars of taxes that you'd be able to save when you compare to any of the alternatives. This doesn't necessarily mean that investing in a TFSA is the absolute best way to invest for every single person, but it's not the worst way for anybody. It's one of those things that I can recommend wholeheartedly to anybody in their situation, but if you're looking for the absolute best, there might be other versions of it, but in terms of just the pure taxes that you'd be able to save. The TFSA, and investing primarily in the TFSA, is the best way to save the most money and taxes over the course of your whole life. Why does that matter? Well, I don't know. You know, paying taxes isn't the worst thing in the world. However, taxes are the largest expense that you are going to have in your life. Whether that's income taxes, property taxes, sales taxes, you name it. By far, taxes are the largest expense you're going to have in your life. And so, as things get more and more expensive as wages perhaps don't necessarily keep out with inflation, as housing gets more and more expensive, looking at your largest expense of taxes and starting today to reduce that tax bill in the future, you'll be able to keep more that money in your own pocket and even for your kids and subsequent generations. So this is episode is relevant for people as young as 18, but also those that are close to or even in retirement. Right now, this isn't going to be a comprehensive TfSA breakdown or anything like that, but just more looking at the aspirational nature of how good a TfSA can actually be, the last reason why you might want to consider this and really prioritizing your TfSA for your long-term investment plan is that it allows you to have the most flexible retirement spending compared to any of the other alternatives. I have a client who has mentioned that they want to help out their kids with buying a house. However, most of their money is tied up in RSPs and to find contribution pension plans. And if you wanted to take out a significant sum of money, all of that money that you take out of your plan, even though it's yours, it is taxable and so the tax bill that comes associated with those withdrawals from your RSPs and your pension plans, that can really get in the way of the long-term sustainability of your retirement. In addition to that, because we work on a tax system that kind of pools together all of your income and taxes it based on the different bracket that you might be in, if you're taking out significant lump sums to say, buy a new vehicle or go on a significant trip or give to your kids or whatever the case may be, that will increase the rate of taxes that you pay in total, because the more income you have, the more tax you pay on each incremental dollar, depending on the tax bracket that you're in. However, if you're in a tax-free savings account. It doesn't matter if you're retired or not, it doesn't matter at all. You can always take out any money from your TFSA and spend it however you want, and none of it will ever touch your tax return. Even if you pass away, your TFSA can transfer to your spouse and it can remain tax-free invested forever. Or if you have kids or even friends or anything like that that you want to leave your TFSA to, if you were to pass away, that money goes to them tax-free as well. So it's really flexible for spending purposes for a variety of reasons, but the idea that you can actually build a significant sum of money that is completely sheltered from taxes is way more valuable than most people give it credit for. So let's take a look at some of the things that you need to do to be able to get to that amount of a million bucks in your TFSA. First thing that you need to do is you need to participate and automate. I've talked about this concept before, but that is my foolproof way to invest. When I say participate, that means that you need to get in the game and own assets that increase in value along with the stock market. In some cases, the bond market, but you need to be positioned in such a way that you can benefit from the growth of the stock market over time. You don't need to pick stocks. You can buy index funds, you can have really diversified portfolios, but you just need to participate and have your fair share of the growth that comes from the stock market in general, and automate is the other side of that. So you need to participate and need to automate, because both you and I Everybody has a discipline problem. There are a lot of things that will get in the way of us actually making good decisions to invest on a regular basis, and so I recommend that you automate it. Every time you get paid maybe once a month or whatever the case is you transfer some money from your bank account to your TFSA and it automatically purchases the investments that are appropriate for you and your risk profile and your stage of life, and you don't have to think about it. You don't have to make that decision every single month. So, along with those two basic concepts of participating and automating, you need to have some level of risk tolerance to be able to achieve a rate of return that's high enough to do it. So, realistically, you cannot save enough money just on your own. You need to have an investment work on your behalf to grow this money for you. So if you have a very, very, very low risk tolerance, I would say that's fine for now, but over time you'll have to increase your comfortability with taking on risk, or else this goal of a million dollars in your TFSA will not be possible for you during a typical human lifetime. So when I talk to people about rules of thumb for how much you should be saving and investing for your long term goals, retirement is the most common one. 10% is kind of that nice round number figure that is easy to point to and it's kind of easy to calculate on your own income. And so I wanted to take a look and see what is reasonable for the median household here in Canada. So averages get skewed between people that make a lot and people that make nothing, whereas the median is actually the person that's right in the middle. And so when I looked at Statistics Canada, I found out that the median household after tax income so it doesn't matter what province you're in after the fact the median household in Canada brings in $68,400, which is $5,700 a month. And so, looking at that figure and the idea that I really like round numbers, especially on a podcast that's an audio platform and it's tough for people to remember really specific figures I wanted to talk about the idea of investing $500 a month. So if I take that $500 a month and I compare it to the median household income, it's only about 8.7% of the take-home pay. Okay, so we are below the rule of thumb, but it's a number that you can remember. We're going to be talking about $500 a month. Another thing about $500 a month is that figure is currently less than the annual contribution room. I'm not going to get into that one on this episode, necessarily, but you have to keep your contribution room in mind and that's dependent on your age, but someone who's 18 this year you have $6,500 of room and so if you're able to do $500 a month I know it's probably a big ask for an 18-year-old maybe they're still in university, but Anyways, the example remains 500 bucks a month still keeps you within your contribution room. Okay, so if you are 18 years old currently, starting from nothing, you have $0 invested and you're able to scrounge together 500 bucks a month to invest in your TFSA and you invest it in a globally diversified portfolio, earning an average of 6% Again, this is round numbers. These aren't guarantees, but work with me on this and you invest that in your TFSA. It will take you approximately just a hair over 40 years to get there. I know I just lost a few of you because this is maybe a get rich quick approach that you're looking for here. No, this is get rich slow, but this is get rich in a way that's really simple and really tax efficient, really straightforward and you can explain it to anybody. It's about as low complexity, high benefit as you can get. The trade off here is spectacular. So for the average person that it retires in Canada, the average retirement age is pretty close to 67 years old. If you're 18 right now and 40 years from now, you've got a million bucks, so that puts you at 58 years old. So the math here says that if you put 500 bucks a month in, that means you'll have invested $240,000 out of your pocket. But if the account is worth a million bucks, that means that you've gained $760,000 from participating in the stock market, all of which is tax free. If this was in an RSP, that would not be the case. If this was in a non-registered account, that would not be the case. Taxes are not applicable on either the 240 or the 760. None of it Doesn't matter if it stays in there, doesn't matter if it earns dividends, doesn't matter if it's capital gains, doesn't matter if it earns interest, doesn't matter if you withdraw it all at once, you could have a million bucks come out of your account. Taxes will never show up there. It's pretty great, okay. So now what if you are someone who's maybe a little bit older and you have some money in your TFSA already? Let's stay with the same $500 a month concept. If you're starting with $50,000, that 40 years shrinks down to about $33,000. And then if you have $100,000 in there. I know that might sound crazy to some people. You'd be surprised how many people listening to this podcast probably have $100,000 in their TFSA. Take you 28 and a half years from now. If you're adding $500 a month, that's not too bad. So if you're earning an average income as a household, again that might be you and a partner. If you're earning an average amount and you're saving even less than a target amount and you're retiring at an average age, you can actually be a TFSA millionaire. It's totally possible and very, very few people are doing it. There was a study a couple of years ago that the Bank of Montreal did, and they found that over half of Canadians didn't know that you could even invest in a TFSA. They thought you could only hold cash in there. If you compare yourself to the average Canadian and you go forward with a strategy like this, you will be so far ahead of them your head will explode. I get people that ask me all the time. It's like oh, do you think the government's going to get rid of TFSAs because the benefits are too good? I said well, canadians actually have to take advantage of them first before it actually becomes a problem in any sort of way. And if the average person doesn't know, you can even invest within a TFSA. We're fine for now. Yes, things can change, of course, but let's plan for the world. That we know already, and most countries around the world have a version of the TFSA, and Canada is actually a little bit more conservative than the versions in the US and in Europe. It's not bad by any means, but this experiment has been run elsewhere and, as far as I can tell, I don't know of any countries that are getting rid of their programs. So what if you say I don't want to do this for 40 years? So okay, save more, you can do more as long as you have the contribution room to do it. So if you're over 18, then you'll have more room than that. So the people that will have the most contribution room are those of us that were at least 18 when the program launched. The TFSA program launched in 2009. So if you're born in 1991 or earlier, you will have the lifetime maximum contribution room right now assuming you've never made a contribution before of $88,000. So if you're currently at least 32 years old here in 2023 and you're saving 500 bucks a month, you will never catch up to your contribution room. So you have plenty of room to do more, to use up the room from previous years that you haven't used yet. What if you're currently 18 and you want to retire again at that average age of 65? And you say, okay, I'm just going to take full advantage of the TFSA room and when it increases, that's when I'm going to increase my contribution rate. Perfect, if you have your income increasing along with inflation, that makes good sense to me, and the TFSA contribution room has increased with inflation ever since it launched back in 2009. It doesn't do it every year, it just does it at around number of five hundred dollars, so it it'll accumulate kind of in the background and then, once it hits the next five hundred dollar threshold, it'll increase again. So, using a little bit of number crunching wizardry behind the scenes, if you're 18 right now and you take full advantage of your TFSA room between now and age 65 and you're invested in a globally diversified portfolio of stocks, using the same projections that FP Canada requests that we use, which points to an average return just over six percent, you would project to have three point eight million dollars by the time you turn 65. That's incredible. It's like this is totally possible. Why would you even bother considering looping in an RSP or worrying about rental properties or anything like that? This is the one thing that you can focus on that can make a huge difference for you and even multiple generations. Funny thing that I always hear online people say, yeah, I want to invest to create generational wealth, like here it is. The only way to make generational wealth is to make sure that the tax man doesn't get in the way. Use your TFSA. This is the greatest advantage that we have as young people and obviously people that are much younger than me have more advantage because they can invest for far longer. But the TFSA is such an amazing tool to build generational wealth. You just have to have the time. The problem is that most people want to spend their money far sooner. So I want to retire at 45. It's like well, okay, well, hope you have a high enough income and high enough savings rate where you can actually make that work. So here's some pushback here. So inflation is the big one, especially because inflation has been in every news headline for the last year and a half. So it's like, well, you know, once I get to be that old, million bucks won't mean anything. It's like, well, news flash here, inflation is going to be a problem for you whether you have a million bucks saved or 50,000 saved. I'd rather have a million, especially a tax free million, because inflation impacts you in the tax department as well. So if inflation is a reason to not invest at all, I would say that is the opposite way to approach that and say you actually need to invest more aggressively to account for inflation. So yeah, you're right, mr Hypothetical Pushback Person A million bucks today is not going to mean a million bucks 40 years from now. However, it's still going to be significant money and you'd be way better off having that than having nothing. Number two that won't be enough to retire on. Like I said before, say you're going to be so far ahead of the majority of people in this country. It will make your head spin. If you can do this simple task not easy, but simple of investing 500 bucks a month from now until the day you retire, or more, 500 or more, you can do that you will be so far ahead of the average Canadian. It's just unbelievable. Or if you're saying, well, that won't be enough to retire on, it's like okay, well, then do more, right? So like, if you can save more than that, please do it like let's go. I'm not limiting anybody here. And if the pushback is genuinely that you don't have the capacity to save, that's going to be a real challenge. And there are programs like the Canada Pension Plan and Old Age Security and the guaranteed income supplement that will help provide income for those folks who can't invest anything on their own, but for most of us that have more income that allows us to spend on things that we don't necessarily need. I would encourage you to take a look at that budget and see how much you can be saving, because the only solution is either to make more or spend less. There's not a whole lot of magic out there. Racking up credit card points, investing in crypto, buying lottery tickets, whatever these aren't reliable ways to get further ahead than your income would currently allow. Unfortunately, that's the reality that to be able to save something, you either have to make more or spend less. I don't want to be too blunt or turn people off, but I also don't want to give you any BS. That just isn't true and that's unfortunately just the fact of the matter. So a lot of the pushback comes down to a lot of mindset issues, and having that be the thing that gets in the way of people actually taking some action. Don't let inflation or the fear that it's not going to be enough keep you from doing anything at all. I would hope that those types of feelings would actually spur you to do even more if you have the capacity to do that. So in conclusion here is it possible to be a TFSA millionaire or have a million bucks in your TFSA? Yes, definitely possible, with the median household income investing 8.7% of your take-home pay. For the median Canadian it is possible over a typical working career and actually significantly shorter than a typically working career. So by doing that and saving at that pace, you'll actually be able to generate significant retirement income entirely tax-free. You will save hundreds of thousands of dollars in taxes in the future by doing this way. It's stupid simple. You can have one account. You could put it in a single fund. Go back a couple of weeks and listen to my episode on single fund strategies. You can have one account, one fund, retire tax-free. That's not bad. You'd think if it was that simple I'd be out of a job. The problem is that very few people are going to do that. Very few people are willing to even do that. They're looking for ways to get cute and creative and yeah, I'm oversimplifying that. There are complexities out there that people run into beyond this. But prioritizing your TFSA first can be a really great option for anybody at any income level and it ensures that you have the most flexible retirement that you can possibly have, free of taxes. You can transfer the money to your kids if you pass away. Transfers to your spouse if you pass away, and they can absorb it and have a double TFSA themselves. It's a really, really great tool and, for those of you that have the discipline to keep things simple, you will never regret prioritizing your TFSA to have a tax-free retirement. I'm really excited to do more TFSA content in the future. If that's something that's interesting to you, let me know in my email. My contact info is in the show notes. You can email me at hello at evannewfieldcom, and let me know what questions you have in regards to TFSAs. Looking forward to more. Thanks for listening today and have a great summer. Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Newfield is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.