How to Retire a TFSA Millionaire

Attention young investors: This one's for you

The Tax Free Savings Account (TFSA) is, without a doubt, the most powerful investing advantage available to regular Canadian retail investors.

Unlike a taxable account (where taxes are paid immediately on any gains) or RRSPs (which defer taxes until the account is wound down in old age), TFSAs are a true tax free option. Unless the rules drastically change, you’ll never pay a nickel of taxes on any gains or from any income the account spins off.

This tax treatment is why I tell most every Canadian investor to max out their TFSA first — and then worry about their RRSPs.

In fact, I’ll take that a step further. I firmly believe that with an aggressive TFSA savings plan, decent investments, and a long time horizon, all a young person needs to do is max out their TFSA to get a decent retirement.

Yes, really. It’s not easy, of course, but very possible.

Let’s take a closer look and see how it can be done.

The numbers

Meet Alex.

Alex is a 22-year-old fresh university graduate who has just gotten her first job with a Fortune 500 company. She makes $60,000 per year and wants to invest in her future.

Sorry, fellas, Alex is not single. Some smart guy has already locked her up.

She decides to make one simple move — to max out her TFSA each year. The cash gets invested into a diverse portfolio of Canadian dividend paying stocks and returns 9% on an annual basis.

Alex’s TFSA contribution room will go up with inflation over time, but we’ll ignore that because we want to look at the potential of this strategy using today’s dollars. Besides, we can’t predict inflation over the long-term.

If Alex keeps this up until a traditional retirement age, she’ll end up with a nest egg of $3.65M. Combine that with CPP and OAS, a likely paid off house, and she’s in line for a very comfortable retirement.

The thing that strikes me about this plan is how easy it is. Alex doesn’t even need to be an active investor to make it happen — she can easily buy ETFs and achieve the same outcome.

Naysayers will show up, of course, and say this isn’t possible, that a steady 9% return over time is a pipe dream or there’s no way someone can consistently save $7,000 each year. Plus, who’s thinking of investing at 22?

Okay, fine. Even though your author was investing when he was 17 (yep, true story), we’ll assume a slightly less bullish set of circumstances:

  • Alex starts investing at 30

  • She earns an 8% annual return, not 9%

  • She only invests $6,000 per year

Great news. She still enters retirement with well over a million bucks.

Step one is complete. We show Alex can get to $1M based on reasonable investing expectations. Now let’s pivot to step two — what she should invest in to get there.

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This document is so good I have it printed out and pinned on the wall right next to my computer. If a potential investment doesn’t pass the tenets, I don’t invest in it — no matter how cheap it might seem or how much growth potential it has.

3 stock ideas for budding TFSA millionaires

I firmly believe a diverse portfolio of excellent dividend growth stocks gives a young saver the best chance of investment success.

Dividend growers offer the following advantages:

  • They tend to deliver consistent, unspectacular returns

  • They’re often safer and more boring than growthier names

  • Dividends flowing consistently into the account helps keep a young investor motivated

  • They’re less likely to suffer catastrophic losses, which can quickly take the wind out of a young investor’s sail

  • Many are household names even non-investors have heard of

Take, for instance, Loblaw Companies (TSX:L), which seems to be in the news every week because its customers hate it so much. An inexperienced investor like Alex might be drawn to the company knowing how painful it is to shop for groceries. By owning a small chunk of the grocery store, she’s a beneficiary of higher grocery prices — especially as that investment grows over time.

Loblaw also owns various other assets — like Shoppers Drug Mart, which is a long-term play on an aging population. It also owns PC Optimum, Canada’s largest loyalty program. Combine that with the portfolio of excellent retail locations it has built up over the decades and its pricing power over suppliers, and there’s a reason why the stock has done so well over the years.

Over the last 15 years, Loblaw shares are up 14.65% annually, assuming reinvested dividends.

Up next is another delightfully boring business that seems to hike prices faster than inflation every year. Intact Financial (TSX:IFC) is Canada’s largest property and casualty insurer, protecting our cars, houses, and other assets. Buoyed by its success in Canada, the company expanded first into the United States and then into the United Kingdom.

As anyone with car insurance can attest — rates only go in one direction, and it’s not down.

What I especially like about Intact is the company’s underwriting skills. Intact consistently posts a combined ratio comfortably under 100, meaning its profitable on an underwriting basis alone. Gains from its investment portfolio are a bonus.

Intact has grown earnings by approximately 7% per year over the last decade. Buoyed by a recent acquisition, growth is expected to be much higher in 2024, with the bottom line expected to expand by 23%. Shares trade at a very reasonable 15x forward earnings, too. That’s helped Intact steadily grow the dividend over time — including hiking the payout each and every year since the company’s 2005 IPO.

Like Loblaw, Intact has delivered surprisingly good returns on a long-term basis. Since its debut on the TSX, Intact shares are up 11.45% per year, assuming you reinvested dividends. That’s definitely enough to help Alex become a TFSA millionaire.

Finally, I’ll feature one of my favourite stocks. Stella Jones (TSX:SJ) is a basic materials company that has carved out some pretty interesting niches — including manufacturing power poles for utility companies and railroad ties for North America’s largest rails. These are steady growth businesses that aren’t impacted by underlying lumber prices.

Stella Jones very quietly does a lot of shareholder friendly things. It has been a steady repurchaser of its shares, reducing the share count by approximately 15% over the last decade. It also has a history of consistently raising its dividend, increasing the payout each year for the last two decades. The last dividend increase was a doozy, with the payout increasing by 22%.

You needed to be patient with Stella Jones — the stock traded sideways for years in the 2010s — but those who stuck around were rewarded. Including reinvested dividends, Stella Jones shares are up 11.48% per year over the last decade. That’s enough to turn a $10,000 original investment into something worth $29.672.

The bottom line

Although there’s no guarantee this plan will work, I’m still very confident in most every young person’s ability to retire a TFSA millionaire. As long as they save consistently, invest smartly, and don’t do anything too stupid, it’s a very achievable plan.

Even if you’re a little older, or don’t have huge plans to become a TFSA millionaire, there’s still plenty of reasons to embrace a dividend growth plan. Seemingly boring stocks like Loblaw, Intact, and Stella Jones can deliver solid returns over time without huge drawdowns — something I think most any investor could use.