Retire Early: How to Turn Your $50,000 TFSA Into $500,000

Based on data from Statistics Canada, the median age of all retirees in 2021 (public and private sector employees) is 64.4 years. However, despite the 2020 global pandemic and rising inflation in 2022, some Canadians still have dreams of early retirement, or at least retiring before the traditional age.

The goal is still possible, provided all the necessary building blocks are in place in your retirement plan. Most plans fail because they are idealistic and unrealistic. First and foremost, time should be on your side, because building retirement savings takes years. The hardest part is the commitment to saving and making prudent investment decisions. Finally, you should also have a retirement product to grow the nest egg faster.

retirement product

Future retirees in Canada are fortunate to have the Tax-Free Savings Account (TFSA). The TFSA is one of the investment tools you can use to save for retirement. You can hold income-generating assets such as bonds, guaranteed investment certificates (GICs), mutual funds, exchange-traded funds (ETFs), and stocks in the account. Cash is allowed but not advisable as money growth is negligible if not $0.

TFSA investors do not have to pay tax on income from investments within the account, while withdrawals are also tax-free. TFSA withdrawals do not count as income, so they do not affect federal government retirement benefits such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS).

If you make the TFSA your primary vehicle for building retirement wealth, maximize annual contribution limits when finances allow. Do not contribute too much to avoid the 1% penalty tax on the excess contribution. But as mentioned earlier, the time frame for investing should be long in order to amass a significant sum.

investing dividends

One way to grow your TFSA balance is to invest in dividends. Let’s consider a high-yielding dividend stock such as Timbercreek Financial (TSX:TF) to see how the power of compounding works. The $678.76 million non-bank lender has a good history of paying dividends, although the track record is only six years.

However, the 8.37% dividend yield and monthly dividend payments are ideal in a TFSA. For the second quarter (Q2) of 2022, Timbercreek’s adjusted net income and total income increased 11.7% to $15.2 million compared to Q2 2021. Chief Executive Officer Blair Tamblyn said, “As we expected , we are seeing the benefits of the recent rate hikes on our predominantly floating rate portfolio, which is reflected in higher interest income.”

Tamblyn added that while rapid rate hikes can affect near-term transaction volume, they generally create opportunities for flexible non-bank or alternative lenders. If you own Timbercreek stock ($8.08 per share), the key to compounding your money is to reinvest the dividends and not touch them at all.

Since the dividend frequency is monthly, you have 12 times a year to buy more shares. Assuming the rate of return remains constant, it would take a little less than 28 years for a $50,000 investment to grow to $500,000. If you’re 32 today, you have a pretty good chance of retiring at 60.

Challenging task

It’s nice to think about early retirement, but implementing the plan is a challenging task. From a compound annual growth rate (CAGR) perspective, you need an investment growing at a 12.2% CAGR to grow $50,000 to $500,000 in 20 years.