Monday, 4 April 2016

Become a TFSA millionaire




When i was younger, I always dreamed of being a millionaire.  Sounds rich doesn't it?  A million dollars is not what it used to be.  It is still a lot of money and you can retire comfortably with that amount.  But how do you get there without winning the lottery.

Before the TFSA (Tax Free Savings Account ) was created, the knock out champion of savings was the RRSP.  Basically a tax deferring setup by the government to encourage saving money for retirement.  The intention was great but deferring meant paying it back at the end.  Everything is rosy when you get those refund cheques for years and years on end but when it comes time to take it out, the tax man is waiting and wait they will.

Along comes the TFSA, all gains, dividends, interest is tax free.  Now the merits of the TFSA vs the RRSP debate will continue.  But I would like to add some thought to it.  RRSP is great for tax deferring but isn't the TFSA better as it is no tax forever?  Yes the TFSA limit is small currently as of 2016 the limit is $46,500.  But here is some thought as to how to become a TFSA millionaire for younger investors.

As long as you max out the $5,500 limit each year and invest in stocks that are able to deliver a decent return over the next few decades, they're almost guaranteed to turn their TFSAs into million dollar accounts by the time they are ready to retire.  Its hard to pick stocks that can stick around for decades, any one of situations can come up to ruin a stock.

A really good example is Kodak in the 1980s.  It dominated the photography industry.  If you bought film, it was a good chance it would be Kodak.  It had a huge presence in photography and cameras.

We all know what happened next.  Kodak did not recognize digital photography.  Shares peaked at $100 each in 1987 and 25 years later, they were worthless.

PICK A GOOD STOCK

Now fast forward to Canada in 2016.  BCE or Bell Canada Enterprises looks to be a Kodak clone.  BCE is Canada's largest telecommunications provider and dominates the industry, providing the systems needed for data hungry consumers to get their fix.  With more and more of our lives centring around the internet both at home and on the go, its hard to see anything but continued demand for the company's services.  It's hard to see what happened to Kodak happen to BCE.

GET RICH SLOWLY

Say you were a 25 year old looking to save for retirement.  To retire at a conventional age, you'd have a 40 year investing period.

Over the last 15 years - including reinvested dividends but excluding brokerage commissions, BCE has gone up 7.6% annually.  This is including the crash of 2008-2009.  As you can see this is not a high flying stock.  Just a solid blue chip stock delivering good performances.  BCE also raises its dividend at least once a year.  Setting up a DRIP for 40 years would be beneficial to yourself.  The magic of compounding working on your side.

If an investor put $5,500 annually into a TFSA and BCE were able to replicate the returns from the last 15 years, it would take 32 years to become a millionaire.  Assuming a start date at age 25, this investor would be worth seven figures by their 57th birthday.  All tax free!

It isn't really hard to get rich slowly.  All investors need to do is to be patient, have a good savings rate, reinvest dividends, and choose good stocks.  The rest will take of itself.

FINAL THOUGHTS

Now I know what you are thinking.  That classic disclaimer, something along the lines that past performances do not always reflect future returns.  With my points above, anything could happen but there are worse places to put $5,500 a year.  BCE delivers a great dividend yield.  There are no MERs to pay for 40 years.   Heck I got the idea BCE was blue chip simply by looking at the top 10 holdings in most top mutual funds, if it's good enough for a mutual fund, its good enough for me.

As always, do your due diligence in investing your own money.

DISCLAIMER : I own BCE shares, enough for 2 shares every time the dividend DRIPs