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Is a $10 Million TFSA Possible?

Part of the challenge faced by Canadian investors is figuring out which registered plan should be used first. Although RSPs (Retirement Savings Plans) provide excellent benefits to certain taxpayers, not every Canadian is taking advantage of this plan. Much more popular with the average Canadian is the Tax-Free Savings Account (TFSA).

As TFSAs allow the flexibility to make contributions and withdrawals on a tax-free basis, investors are opting for the greater flexibility of these plans in increasing numbers.

For certain people, however, TFSAs are not used to save and withdraw money every few months or years. Instead, they serve as long-term savings vehicles that will be drawn down only in retirement. In these cases, the question is very straightforward: Is it possible to accumulate $10 million in a TFSA by achieving reasonable investment returns?

While the short answer is yes, there are a number of things which have to be done to hit the mark.

The very first thing an investor has to do is start early. Assuming a 20-year-old makes annual contributions of $5,500, which are never indexed to inflation, the money will have to compound for many years to reach $10 million. Assuming an annual rate of return of 12.5%, the time it would take to reach the mark is no less than 46 years. Under these circumstances, the contributions total approximately $253,000 with the remainder coming from investment returns.

Investors achieving a higher rate of return of 15% will make only $220,000 in contributions over a 40-year period to reach the same number.

While it is surprising to see how attainable it is for investors to become very wealthy through the use of only a TFSA, the conundrum faced by many is finding the right investment.

Enter Pure Industrial Real Estate Trust (TSX:AAR.UN), called PIRET for short.

The returns have been nothing short of spectacular over the past few years. In the past year alone, investors have realized capital appreciation close to 30% in addition to a dividend which would have been in excess of 6.25% only one year ago. If we evaluate the returns over the past five years, investors have done exceedingly well. The price return has been nothing short of 43% with an annual dividend close to 6%. The total return over the past five years has been close to 75%, translating to a compounded annual growth rate close to 15%.

While shares of PIRET have performed fantastically for existing investors, those looking to make a new investment may want to look at this company very carefully. In investing, we have to weigh what we are getting to how much we are paying for it. In the case of this fantastic REIT, investors who got in early may have gotten the best deal.

The stock currently trades at a 15% premium to its tangible book value; new investors may have a very difficult time achieving an annual return of 15% with this company.

Not to worry; the $10 million balance is still within reach. We just have to keep looking!

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