What does it take to become a millionaire? To most folks 1 million dollars is a lot of money and the thought of being a “millionaire” often seems unattainable.
Today I set out to determine just what it would take to reach 1 million dollars through a Tax Free Savings Account.
To conduct my analysis I pulled together a TFSA calculator in excel to compute total TFSA value over different investment timelines with different assumptions for annual contributions and annual rate of investment return. The table below summarizes my results.
Annual Inflation Rate: 2%
Annual Contribution: $5,000 (maximum possible contribution)
No TFSA withdrawls
In summary, to accumulate 1 million dollars one would need to contribute the maximum annual amount to their TFSA each year for a 30 year period and achieve an annual investment return of 10%. Putting this in perspective, it doesn’t seem that unachievable to reach 1 million dollars if you have a long investment horizon and a commitment to annual savings through your TFSA.
The Tough Part
Maintaining the maximum annual contribution to your TFSA every year may be challenging. Sometimes, life events occur such as a job loss, divorce or illness that can impede your ability to contribute to your TFSA every year. The good news is that with a TFSA you can always make up any missed contributions in future years.
The value of your TFSA at the end of your investment time-line is heavily dependent on the average annual investment rate of return that you are able to achieve. For example the difference between a 10% and 12% average annual return (2% difference) over a 30 year investment timeline is ~$500,000.
If anything, this analysis emphasizes to me the importance of investing from an early age to maximum the benefits of compounded returns.