The Tax-Free Savings Account (TFSA) is a popular registered account for saving and investing. All income earned in the account is tax-free. Likewise, all capital withdrawn from the account is tax-free. It just means that investors can invest without any concern for tax and really compound their accumulated wealth.
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How much does the average Canadian have saved in a TFSA at 45?
As individuals and couples approach midlife, retirement may not be totally on your mind. However, having an emergency savings fund and an extra nest egg for vacations, bigger expenses (like children’s college tuition), or even early retirement becomes more important.
As of 2023, the average Canadian aged 45 to 49 years has a TFSA value of $24,150. It is good to hear that the average 45-year-old Canadian has $24,150 in TFSA savings. However, given that the combined TFSA contribution limit is $109,000, it means that many Canadians are simply not maximizing the account.
Don’t treat your TFSA as just a savings account
One major TFSA error is to just treat the account as a “savings account” like its name suggests. Banks offer promotional “high-interest” TFSAs that rope many savers in.
Sure, 2% interest is better than no or low interest in a typical savings account. Yet, it is hardly enough to create serious wealth. In fact, after inflation (which seems to be persistently above 2% these days), your wealth is actually losing value over time.
While investing is higher risk, it is a better way to optimize returns and turn your contributions into something meaningful over time. Buying index exchange-traded funds (ETFs) is one way to get started. You can buy the index of a market, hold it, and watch your returns rise (and sometimes fall) with the broader market.
Here at the Fool, we are stock pickers. We like building portfolios of at least 10-15 stocks where you get exposure to a mix of markets, industries, sectors, and asset classes. If you are looking for a very basic portfolio structure for a TFSA, here is how I would set it up.
Defensive stocks
First, I’d buy three to five defensive dividend stocks for my TFSA. These act as ballast for my portfolio. The stock market can be volatile, so I want a few stocks that fluctuate less than the market and pay a steady income stream.
Fortis (TSX: FTS) is a great example. It is a large utility across North America that is 99% regulated. It has raised its dividend annually for 52 years!
Blue-chip stocks
Then I’d hold three to five blue-chip or industrial stocks. These are not flashy businesses, but they have a good record of delivering solid total returns for shareholders.
Canadian Pacific Kansas City (TSX: CP) fits this perfectly. It has a record of being very well-managed and delivering steady returns. It has a network that expands across North America that should fuel low double-digit earnings growth in the coming years.
Growth stocks
Lastly, I’d hold a mix of higher growth/slightly more speculative stocks. These stocks can have more upside, but they can be more volatile. Descartes Systems Group (TSX: DSG) is a tech stock focused on logistics networks and software. It has compounded earnings by a mid-teens rate for over a decade. Its stock is down on AI fears, but it looks like a great buy on the pullback.
The Foolish takeaway
If you want to build wealth in your TFSA over the long term, think about disciplined savings and thoughtful investing. Over time, the tax-free compounding process can turn your mid-life savings into a retirement nest egg that you can rely on.
