The #1 Investment Vehicle for Millennials

Jonathan Adomait |

Welcome back and Happy New Year!

Hopefully you've had a chance to enjoy some turkey, sweets, and time spent with family and friends over the Christmas break. Since the non-retired folks are back to work and setting new goals for the coming year... I thought why not challenge all of you to make a TFSA investment one of your goals for the year. At the very least, please encourage your children to take advantage of a TFSA.

If you keep reading, I'll also share why I believe the TFSA is the #1 investment vehicle millennials should use for reaching retirement, and how they aren't being properly utilized.

So, what is a TFSA?

A TFSA stands for Tax Free Savings Account, and unlike almost every other government program where you are taxed in one form or another, any growth or interest earned inside a TFSA is not taxed - no capital gains tax, no interest income tax, and no tax on your dividends. 

Cumulative contribution room inside of a TFSA has been growing since 2009, and if you were born in 1991 or prior, you now have cumulative contribution room of up to $69,500 to invest inside a TFSA. And if the trend for the TFSA continues, the government will continue to grant us another $6,000 in TFSA room each year, indexed to inflation.

And... any of your unused contribution room stays intact for you to use at a future date!

The mistake people are making...

Currently, 57% of Canadians take advantage of TFSAs compared with 53% of those taking advantage of RRSPs.* The trick to maximizing the benefit of a TFSA is how the account is used. Most Canadians, through no fault of their own, think of the TFSA as strictly a savings account. 
*Source: RBC

The problem lies with what Canadians are putting inside their TFSAs, which is overwhelmingly savings accounts or cash. Almost half of Canadians (43%)* have their TFSA invested into cash or so-called  "high interest" saving accounts. Since cash is not taxed, what's the point of having it inside your TFSA?! 
*Source: RBC

Instead, you should fill it with your highest growth assets, the ones that would attract the greatest amount of tax, and definitely not cash or a "high interest" bank account. The investment choices for inside of a TFSA include mutual funds, GICs, stocks, bonds, ETFs, and more. 

Why this matters for Millennials...

I truly believe this is the ultimate vehicle for millennials... and I'm going to try and illustrate that for you.

Let's say you're financially disciplined and you've managed to set aside the annual contribution limit each year since 2009, and you have $69,500 sitting inside a TFSA. Let's also assume you invest in an asset with a moderate growth rate and can achieve a 5% CAGR (compound annual growth rate) while continuing to max out the $6,000 TFSA contribution each year. (I didn't assume the annual contribution room increasing with inflation in this scenario.)

In the scenario I modeled after myself below, I stayed invested for 25 years and ended up with a TFSA worth approximately $521,000. (See below) 

In this case, I happen to be 53 by the time my TFSA will reach $521,000. Not a bad chunk of change! 

Let's suppose I decide to take an early retirement at 53 and want to start withdrawing funds from the TFSA. If I end up living another 30 years and have the TFSA continue to generate a 5% CAGR, I could start drawing about $25,000/year tax free, and gradually pull out more and more for 30 years. In my final year I'd pull out $45,000! (See graph below)

Hopefully you can see the benefit of plans such as this.

Imagine having a pension, generating income of $50,000/year, CPP income, OAS income, along with an extra $25,000-$30,000 in tax free income that doesn't even claw back your OAS!! You could expect to have a retirement income around $100,000/year.

Imagine if you had this opportunity back when you were in your 20's or 30's or, if you're my age, having this opportunity at your fingertips today.

It's time to take advantage of this, and it's never too late to get started. If you're looking for some guidance or want to get started, feel free to reach out - we'd be happy to walk you through the process.

For those of you already taking our advice to max out your TFSAs and fill them with growth assets, pat yourselves on the back because you're already ahead of  the majority of Canadians.

See you next month,


Jonathan Adomait
Financial Advisor, BASc

P.S - Have questions or want us to discuss a particular topic? Let us know by sharing your feedback!