You’ll need time, discipline and a little help from the taxman. The Globe and Mail’s simple TFSA calculator can help you quickly and easily figure out what your TFSA (Tax Free Savings Account) might be worth down the line under different assumptions. The calculator takes into account current TFSA contribution limits including planned limit increases based on inflation. The following inputs will get you to $1 million +:
Expected Annual Rate of Return: 5% (fairly conservative from a historical perspective but prudent looking forward)
Dollar Amount I Will Start With: $46,000 (if you’re just starting out today this is your cumulative contribution limit through 2016)
Number of Years That I Will Contribute: 35
So if you’re 30 today you’ll have your $1 million by the time you reach normal retirement age at 65. Now it’s unlikely $1 million in 35 years will have the same purchasing power it does today but nonetheless the calculator clearly illustrates the often overlooked magic of compound interest over time. In order to get to $1 million under the above assumptions you only actually contribute $368,000 – the rest comes from compounding investment returns. Of course you have to do your best to ensure you actually achieve your target rate of return. This doesn’t mean you need to swing for the fences. Just stay out of trouble – the trouble we see most often includes:
- High and/or hidden fees
- Lack of diversification
- Inappropriate investments for your risk profile
- Poor investor behaviour
For example, if you get into trouble and knock 2% off your annual investment returns, you’ll end up with $350,000 less. In other words, that trouble will destroy more than 60% of the return portion of your TFSA nest egg.
Remember this is just a calculator and nothing is certain but do your best to stay out of trouble and start compounding your way to retirement!