Did you know that you may be eligible to deposit up to $95,000 into a Tax-Free Savings Account (TFSA) in 2024? If you were 18 or older in 2009, then $95,000 worth of contribution room has accumulated over your adult life. If you are 33 years old and haven’t deposited any money into a TFSA yet, then your accumulated contribution room is $95,000. You can use all of it immediately. If you are younger than 33 or have already contributed, then your contribution room is $95,000 minus your contributions, minus the room added in years when you were younger than 18.
That’s very interesting because this is just the amount needed to achieve an amount that you could retire on within 30 years. The TSX index has delivered a 9.69% annualized total return over the last five years. If it keeps delivering such returns, then a $95,000 investment in a TSX index fund could grow to $955,000 in less than 30 years. Currently, most Canadians think they need $750,000 to retire comfortably, so $955,000 is probably a reasonable retirement goal for a few decades from now. Here’s how you could get there, starting with a $95,000 investment today.
How you could get to $950,000 in 30 years
If growing $95,000 into $950,000 sounds to you like a feat that would require a massive amount of luck to accomplish, think again. It can be done in thirty years using just average market returns. As mentioned previously, the TSX has compounded at 9.69% per year over the last five years. It would be a little unwise to simply assume that that rate of return will continue, so let’s go with 8% as our forward compounded annual growth rate (CAGR) target.
Compounding at 8%, $95,000 grows to $955,952 in 30 years. Considering average inflation over the last few decades, that might be an adequate sum to retire on in 2054 — assuming that the Canada Pension Plan (CPP) remains solvent and/or you have an employer-sponsored pension.
Investments you could consider
If you are sold on this idea of building your retirement nest egg with defensive investments, you could consider an investment in an index fund. iShares S&P/TSX Capped Composite Index Fund (TSX: XIC) is a Canadian index fund that replicates the performance of the TSX almost perfectly. It charges only a small 0.04% fee, meaning that its performance will not differ significantly from the index over a long period of time.
Theoretically, an index fund could fail to track its index due to a tracking error (the ETF not matching the returns of its constituent stocks due to illiquidity), but XIC is liquid enough that that probably won’t happen. There are enough XIC units trading hands daily that the fund is consistently being redeemed for equivalent baskets of stocks. The tracking error will be minimal.
If you want to get more adventurous with individual stocks, you could consider a name like Brookfield (TSX: BN). BN is a company, so it’s not as diversified as a fund like XIC, but it’s fairly diversified as far as individual companies go. It has a 75% ownership stake in a massive asset management business, a large real estate portfolio, and ownership stakes in partnerships that it runs.
This all adds up to an ultra-diversified corporation. Of course, in order to acquire all these great assets, Brookfield has had to borrow heavily. The interest rate risk is real. Fortunately, the company’s debt is well managed enough that most of it can’t affect it at a corporate level.
