One of my long term savings strategies revolves around consistently making the maximum contributions to my Tax Free Savings Account (TFSA) and avoiding any major withdrawals over a significant time horizon. In fact, my goal is to have enough savings built up in my tax free savings account to fund my retirement income 35 years down the road.
The tax free savings account is a great tool for building long term wealth due to the fact that all capital gains and dividend income is allowed to grow and compound tax free similar to an RRSP account. Although TFSAs do not offer any tax deduction benefit on initial contributions like an RRSP, all savings within a TFSA can be withdrawn tax free at any time.
Through the power of compounding returns, a long investment time period and the ability to withdraw my savings tax free I hope to build a sizable capital base which will generate enough income to enjoy a decent lifestyle in retirement. To give you an analogy I like to think of my TFSA strategy in terms of a small snowball that you gradually begin to roll down a hill. After a while that small snow ball transforms into a much larger snowball as it gains momentum. My TFSA will act in a similar fashion as the small snowball and over time grow through the compounding of tax free returns until it is spitting out enough tax free cash to comfortably fund my retirement.
In order to quantify the potential of this strategy I have developed a Tax Free Savings Account Calculator. Please feel free to download it and plug in your own inputs which match your unique situation.
To provide some background I am currently 23 years old and am looking to retire in about 35 years at the age of 57 which is consistent with the maximization of my corporate pension.
TFSA Calculator Scenario:
- Investment Term: 35 Years
- Starting Year: 2009
- Current Age: 23
- Starting TFSA Value: $0
- Annual Contribution Amount: Maximum Allowable
- Annual Nominal Return on Investment: 10.00%
- Average Annual Inflation Rate: 2.1%
Given the conservative inputs above I will have $1,780,951 in 35 years when I am 57. This is not bad considering I can withdraw it all completely tax free. At a 10% nominal return on investment my TFSA account will be producing around $162,000 in capital gains and income in when I am 57. That is certainly enough to retire comfortably with a withdrawal rate that does not eat into my capital base.
Download TFSA Calculator
TFSA Calculator (Excel 2003) | TFSA Calculator (Excel 2007)
If you use the calculator please let me know by email if you have any comments / suggestions / problems.
