What Does It Take to Accumulate $1 Million?
“A million dollars isn’t what it used to be.” Even with low inflation that saying is true. Depending on where you live, your home may easily be worth over a million dollars. To my surprise, there are over three hundred $1,000,000+ listings within the city limits of London, Ontario, where I live.
However, unless we sell or borrow against it, we cannot live off our principal residence. To cover our living expenses, we generally need to accumulate wealth that can easily be turned into cash. This is where saving and investing in securities can help us. A million dollars held in an investment account is, in my opinion, much more useful for daily living than a million-dollar home.
What does it take to accumulate a million dollars in financial assets? That is the topic of this week’s blog post.
Assumptions
Account Type: TFSA
For simplicity’s sake, I decided to limit this experiment to the Tax-Free Savings Account (TFSA). Doing so means I do not need to account for tax on interest, dividends, or capital gains, each of which would need to be declared annually if held in a non-registered account. It also means that I don’t need to account for the tax deduction that contributors to Registered Retirement Savings Plans (RRSPs) receive or the eventual taxation on withdrawals. Finally, the cap on annual contributions to the TFSA is the same regardless of income, unlike the case for RRSPs. A cap also “levels the playing field” when considering non-registered accounts because someone with a high income can contribute as much as they wish to a non-registered account whereas the annual limit on TFSA contributions applies regardless of income. Granted, contributing to the limit in a TFSA is easier for those who have higher incomes, but it is not dramatically different.
Expected Returns
I have decided to use the 2024 return expectations as set by the Institute of Financial Planning and FP Canada Standards Council™ Projection Assumption Guidelines.
The portfolio I am using is based on the model portfolios presented on the Canadian Portfolio Manager website for VEQT, Vanguard Canada’s All-Equity ETF Portfolio. The table below shows the calculated return in both nominal and real terms.
The real return accounts for inflation so that a 6.36% nominal return (after deducting the Management Expense Ratio or MER) is equivalent to a 4.17% real return assuming average annual inflation of 2.10%.
Annual Contribution Limits
I assume that the contribution limits will continue to increase in $500 increments in line with long-term inflation expectations of 2.10%. The table below shows the year for each expected $500 increase in the contribution limit. Remember, as of 2024, the contribution limit was raised to $7,000.
I assume that contributions are made in lump sums at the beginning of each calendar year.
Scenarios
Scenario 1: Investing since 2009
I tested out two scenarios. In the first, our TFSA investor was born in 1991, making her 18 years old in 2009, the first year that the TFSA became available. Although investment accounts were not as common in the first couple of years, limiting many to deposit accounts only, for this blog post, I assume that the equivalent of VEQT was available in 2009. The investor maximized contributions each year, beginning with $5,000 in 2009, adjusting upward according to inflation in $500 increments (except for 2015 when the Harper government increased it to $10,000). As of 2024, the contribution limit is $7,000, or a cumulative figure of $95,000 for those who have been eligible since 2009.
As of 2024, our investor is 33 years old and has invested the full $95,000, each contribution being made annually at the beginning of the calendar year.
Scenario 2: Investing since 2024
Our second investor was born in 2006, making him 18 years old this year. This is his first eligible year, so his first contribution is limited to $7,000, which he did on the first business day of 2024.
Results
Scenario 1
How long will it take to accumulate a million dollars? In Scenario 1, as of the end of 2024, our investor is projected to have accumulated $163,490 in nominal terms. Assuming she continues to invest at the beginning of each year according to our projected annual contribution limits, by the end of 2046, when she will be 55 years old, she will have accumulated $1,047,150. This is based on a cumulative investment total of $293,000 over 38 years.
If we acknowledge inflation in our calculations, then our investor will need to keep contributing to age 64, which she will reach in the year 2055, her 47th year of contributions, when her TFSA account is projected to reach $1,073,333 in real dollars ($1,976,144 in nominal dollars). This will cost her $404,500 in cumulative contributions.
Scenario 2
For our younger investor, who opened a TFSA only this year (2024), starting at $7,000, it is projected that he will reach his million-dollar goal ($1,072,343), in nominal terms, by the year 2057, when he will be 51 years old. In other words, he will have achieved his goal in only 34 years, but it will have cost him $344,000 in total contributions to get there.
Using inflation-adjusted or real returns, our younger investor will need to keep contributing to age 57, which he will reach in 2063, his 40th year of contributing. At that point, his TFSA will be worth $1,000,575 in real dollars ($1,663,533 in nominal dollars). His total contributions will have added up to $433,500.
Observations
It needs to be acknowledged that not everyone will be comfortable with a 100% equity portfolio in their TFSA, let alone be able to contribute the maximum each year.
It is also fair to say that not everyone will have the “runway” that these younger investors have to grow their TFSAs to a million dollars. I know that I am not likely to achieve that target even though I have maximized my contributions each year.
Having said that, a million-dollar TFSA is likely achievable for many Canadians and, in the nature of TFSAs, doing so does not require extraordinarily large contributions.
This is the 260th blog post for Russ Writes, first published on 2024-09-02
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.