Are you happy about your contribution increase to TFSAs?
If you haven’t heard already, the new 2015 budget was released last Tuesday April 21st, 2015 and it has a HUGE contribution increase to TFSAs (or Tax Free Savings Accounts, for those not aware of them). We’re talking a 82% increase to our 2015 contribution room. This brings the 2015 contribution room to 10,000 dollars, which is effective immediately!
What I like about TFSAs is that anything earned in them is able to be withdrawn completely tax free. The down side of this is that if you’re holding higher risk investments you do not get to claim capital losses on this. So just follow the 2 rules for investing from the most successful money manager ever, Mr. Warren Buffet’s and you’ll do fine:
- Never lose money
- Never forget Rule #1
Ok so we can’t all be Warren Buffet, after all someone has to lose in the market for the rest of us to gain. So let’s look on the conservative side. If you were 18 as of 2009 when the TFSAs were introduced, this means you have 41,000 dollars of contribution room. Max your contributions yearly for 30 years into something relatively safe like an index fund to match the market you’ll end up with $693,828.68 before retirement as you can see from the investment calculator output below.
Now that’s an extremely conservative interest rate. The S&P 500, which is an index of the 500 largest companies listed on the NASDAQ or NYSE based on market capitalization. Basically it’s a share of each of the 500 largest public companies. It’s a pretty safe bet. As you can see from wikipedia’s chart of annual returns of the S&P 500, since 1970 the median of the 5 year annualized returns is 13.96%
Statistics are a funny thing
I’m no expert in statistics but I do enjoy how people manipulate statistics to serve their points. In this article (link) they state “Individuals with annual incomes of less than $80,000 accounted for more than 80 per cent of all TFSA holders…”. Which seems like the government is trying to play down the “only helping the rich” angle a lot of people try to play.
After a quick check on some statscan information I noticed that only 14.27% of Canadians have an income greater than $75,000 annually. So really I might not be too far off assuming 80% of Canadians who drink water everyday have an income of $80,000 annually or less. All that fact is telling us is that the people starting TFSAs are proportionally equal to the average Canadian based on income.