How to Turn a $6,000 TFSA or RRSP Into $600,000
Written by Kay Ng at The Motley Fool Canada
Your personal savings are an important part of your retirement savings. Retirement plans, including the Canada Retirement Plan and Old Age Security, would help you contribute more to your retirement income.
The more you save, the more comfortable your retirement can be. In fact, you can even aim for early retirement. You can grow your portfolio 100x by starting with $6,000 and going up to $600,000 and more! All it takes is serious retirement planning and discipline to pull off a solid plan.
Step #1: Save regularly
The first step is to start saving regularly in your tax-privileged accounts like your Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). If you can save regularly in both accounts, that’s best. It would serve most Canadians best to contribute to their TFSAs first, as all income therein is tax-free. However, be aware that there are penalties for contributing too much to your TFSA.
For high-income earners in high tax brackets, it would be wise to contribute to their RRSPs first to reduce their taxable income for the year and earn tax-deferred returns in their RRSPs. The refund from RRSP contributions can then be used to contribute to the TFSA.
It would be a good start if you could deposit $500 per month into the accounts. That would equate to savings or contributions of $6,000 per year.
Step #2: Invest for high returns
It would not do your retirement well if you put all your savings in GICs, which would erode your purchasing power as inflation is currently high. For your limited and valuable TFSA or RRSP contribution space, you want high returns.
Historically, the stock market has delivered the highest returns over the long term. The Canadian stock market is used as a reference iShares S&P/TSX 60 Index ETF as a proxy, has produced annualized returns of 8% over the past decade.
Higher returns come with higher risk. Stocks are volatile. Their performance is affected by the macroeconomic environment and the underlying companies that drive the stocks. In the worst case, a company can go bankrupt and the corresponding share becomes worthless.
The stock market is in the red this year. The prominent macro headlines these days revolve around high inflation and rising interest rates, pushing down stock valuations and creating buying opportunities for long-term investors.
It wouldn’t be far-fetched to aim for a 12% compound annual floor return on new cash invested in quality stocks today.
Where can you invest today for a 12% return?
Toronto Dominion Bank (TSX:TD) is a low-risk, quality stock that can generate returns of more than 12% per year over the next three to five years. The bank’s stock is down about 9% year-to-date, putting the stock at a discount of about 10% to its long-term normal valuation.
Importantly, it’s outperformed the industry by growing its earnings per share (EPS) at about 8.8% annually over the past decade. The bank’s focus on retail banking in Canada and the US should allow it to continue growing at a good pace over the long term.
Assuming a more conservative earnings per share growth rate of 8% combined with its current dividend yield of 4.1%, it could yield long-term returns of just over 12%. Any valuation expansion simply adds to that return.
TD stock dividend is safe. The payout ratio for the trailing 12 months is 41%, which is at the low end of the 40-50% payout ratio target range.
Building a $600,000 portfolio
If you can start from scratch and invest $6,000 per year at a CAGR of 12%, you’ll reach $600,000 in less than 23 years. While buying TD stocks on weakness is a good place to start, remember to invest in other top stocks to ensure adequate portfolio diversification.
The article “How to Turn a $6,000 TFSA or RRSP into $600,000” first appeared on The Motley Fool Canada.
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Stupid contributor Kay Ng has positions in TORONTO-DOMINION BANK. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
2022