Do you want to reach a $1 million Tax-Free Savings Account (TFSA) balance?
If so, you’ve got a worthy goal, but it’ll be a tall order to get there. As of March 2023, the maximum accumulated TFSA contribution room a person can have is $88,000 worth. That’s a decent chunk of change, but it would take vastly superior returns to grow it to $1 million in a short time period.
In this article, I will explore how much money you’d have to invest to have a legit shot at $1 million in your TFSA.
About $100,000 could do it
It would be possible to get to $1 million in a TFSA starting with $100,000. If you have $88,000 worth of contribution room now, then you will arrive at about $100,000 worth of contribution room in two years’ time (the government adds around $6,000 worth of room each year).
We can illustrate this point with an example. Enbridge (TSX:ENB) is a Canadian oil stock that has a 6.9% yield. “Dividend yield” means dividends paid as a percentage of the amount you paid for a stock. If you have a 6.9% yield, then you get $6,900 in cash each year on a $100,000 investment. If you get a $6,900 dividend plus a meagre $3,100 capital gain each year, then you’re making a 10% annualized return.
How quickly can you get to a million with that return? Well, it takes 7.2 years for an investment growing at 10% to double in value. It takes 3.3 “doubles” for something to rise to 1,000% of its current value. So, if Enbridge can maintain its 6.9% dividend yield and rise 3.1% per year, then it will take 23.75 years for a $100,000 position in it to grow to a million (if you re-invest the dividends).
The above example is purely for illustration purposes, of course. Enbridge is in no way guaranteed to rise 10% per year. It’s a solid company that has long-term contracts shipping oil all over North America, but it faces risks too. Notably, it has a large amount of debt and a tendency to get into legal battles when building new pipelines. It is not guaranteed to rise at 10% or even deliver a positive return. But a 10% return is only about average for stocks over the last few decades, so there’s definitely a chance ENB could make it happen.
The bottom line
As we’ve seen, it doesn’t take enormous returns to get to a $1 million TFSA. If you invest $100,000 in one stock, you could get there in just a little over two decades at just a 10% annual return! The magic of compounding is truly remarkable to behold.
However, in the world of investing, nothing is ever truly guaranteed. I showed above how Enbridge could grow to $1 million in 23.75 years with its dividend and some very small capital gains. But you never know: the dividend could be cut or the stock price could go nowhere. The future is always hazy. Therefore, it is best to invest in a diversified portfolio, let’s say 25 stocks minimum, to make sure you don’t have all your eggs in one basket.
