Investment strategy for your TFSA?
There's been a lot financial porn written about Tax Free Savings accounts, and how you can earn interest "tax free".
ING Direct says this in some of their advertising promos...
But depending on your age, current holdings, and investment horizon (when you think you'll want to spend the money) this might not be the right strategy.
I'm using the TFSA to hold individual stocks. In particular some income funds, that are yielding around 12% in distributions, with possible future growth. I'm not saving money to then spend it in a few years on a new house or other large purchase. Instead I'm using the TFSA as an investment vehicle for my future retirement.
With the stocks being so cheap currently, why would you want to hold GICs, bonds or other fixed income low-yielding investments in it? Heck, put the $5000 in either XIU or XSP (Index funds). Something that will actually grow at a reasonable rate, especially given the current market prices.
If you put $5000 per year in your TFSA, and it grew at 12% per year, then in 20 years you'll have about $400,000. That's more savings than some people nearing retirement now have in their RRSPs!!
If you were playing it 'safe' and instead had that money sitting in some "high interest" earning vehicle at 3% then after 20 year's you'd only have about $140,000.
Hmm.... $400,000 or $140,000...I'll say thanks, but no thanks, to that 'high interest' savings option.
Some may think 12% yearly return is unrealistic, alright, bring it down a notch and say you earn 9% a year in a broad-market low-MER index fund. After 20 year's that's still about $280,000 built up versus the $140,000 3% interest earning option.
The only reason I'd go with the lower return interest earnings that the banks are offering is if you felt you needed that money in the short term. If you were say already elderly and about to retire, or if you were going to make a large purchase in the short term and would need to withdraw the money in the next few years.
Anyways, there's a very good discussion on this topic taking place at http://www.financialwebring.org/forum/viewtopic.php?t=109217
ING Direct says this in some of their advertising promos...
...let you save without paying tax on the interest you earn. This means that soon all Canadians will be able to save up to $5,000 every year without being taxed on interest earned. This is great news for savers. And we're very excited!
But depending on your age, current holdings, and investment horizon (when you think you'll want to spend the money) this might not be the right strategy.
I'm using the TFSA to hold individual stocks. In particular some income funds, that are yielding around 12% in distributions, with possible future growth. I'm not saving money to then spend it in a few years on a new house or other large purchase. Instead I'm using the TFSA as an investment vehicle for my future retirement.
With the stocks being so cheap currently, why would you want to hold GICs, bonds or other fixed income low-yielding investments in it? Heck, put the $5000 in either XIU or XSP (Index funds). Something that will actually grow at a reasonable rate, especially given the current market prices.
If you put $5000 per year in your TFSA, and it grew at 12% per year, then in 20 years you'll have about $400,000. That's more savings than some people nearing retirement now have in their RRSPs!!
If you were playing it 'safe' and instead had that money sitting in some "high interest" earning vehicle at 3% then after 20 year's you'd only have about $140,000.
Hmm.... $400,000 or $140,000...I'll say thanks, but no thanks, to that 'high interest' savings option.
Some may think 12% yearly return is unrealistic, alright, bring it down a notch and say you earn 9% a year in a broad-market low-MER index fund. After 20 year's that's still about $280,000 built up versus the $140,000 3% interest earning option.
The only reason I'd go with the lower return interest earnings that the banks are offering is if you felt you needed that money in the short term. If you were say already elderly and about to retire, or if you were going to make a large purchase in the short term and would need to withdraw the money in the next few years.
Anyways, there's a very good discussion on this topic taking place at http://www.financialwebring.org/forum/viewtopic.php?t=109217
posted by Rick | 9:42 AM
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