How to Build a $100K TFSA

Okay by popular request I’m going to dive a bit deeper into how on I managed to build my TFSA to almost $100K balance since I started it back in 2009 despite only contributing $57,500. My annual return has been 10.5% since 2012 (I would have to dig in my archive to pull out the earlier years but you get the idea).

Honestly the first thing you should do to get an high TFSA balance is to use your full contribution limit each and every year as soon as possible.  Letting the contribution room build up is like letting dust bunnies grow behind your furniture.  It doesn’t help anyone.  If you don’t use it it won’t have compounding growth which keeps the balance growing.

You also have to decide what exactly your TFSA is going to be for your overall financial plan.  You can use it to park your emergency savings but that will result in your having less growth.  In my case, both my wife and I decided that the TFSA would be for income purposes.  We wanted to generate a steady stream of income from our accounts to help fund our retirement.  So while it grew fairly quickly since 2009 we do expect it to slow down going forward as we start to take money out of the accounts.

Now the third key thing to is to accept that if you want a big balance you are going to have to take some risks.  Using your TFSA as a high interest savings account or GICs is dooming your balance to stay low.  There is nothing wrong with those investments depending on your objectives for your money just don’t be so conservative that you are losing to inflation each year.  As I mentioned above our objective was income so we started off with individual stocks of dividend paying companies.

To find the companies that we would end up investing in we looked at our own bills we paid each month and bought in similar sectors.  After all monthly bills often mean long term clients that pay regularly into the business which gives the company cash to pay out dividends.  So we ended up looking at banking, insurance, telecommunications, utilities,  oil and gas, and real estate income trusts.  We then looked to have at least two different companies for each sector we invested in as we didn’t want to have all our eggs in one basket.  Also we tend to look towards higher yield companies as we planned the TFSAs as our highest risk accounts so we expected to be compensated for that risk (we typically looked at companies with about a 5% or higher yield).  Please note yield for a stock is just the dividend payout annually divided by the share price shown in percentage.  A high yield can be the result from a company having a period of bad news that temporarily drives down the share price.

Once we identified a potential company in a sector by yield we would then pull open its last annual report and flip to its asset and debt balance sheet and look for its retained earnings.  A good value here usually indicates the company is sitting on some cash so in event of a downturn in their business they can keep paying their dividend.  If the retained earnings were low and the debt levels were high we would often avoid buying the company.  Also at this time we would take a look at how long has the company been paying a dividend and how often they increase it.  Steady dividend growth often means a decent growth in the company overall which is good for the share price in the long term (and your TFSA balance if you buy shares in the company).

Later on we added an ETF of preferred shares to our TFSAs instead of bonds to give a bit more balance to the risk profile of the accounts but still focus on producing income.

Then the last factor in getting a high TFSA balance is: luck.  You occasionally will pick a company that does REALLY well the spikes your balance.  For me it was AQN (Algonquin Power & Utilities Corp) which I managed to buy when it was under a cloud of doubt due its debt level but the overall numbers looked fairly good and utilities have very dependable cash flows. My yield based on my purchase price is somewhere above 10% now.  For my wife, she bought MFC (Manulife Financial Corp) and the share priced increased by around 30%.  So yes, that is hard to predict but it does occasionally happen.

So what do you use your TFSA for and are you happy with your return?

July 2018 – Net Worth

Welcome to my net worth posts where I try to prove to myself and you that I wasn’t crazy for leaving work in the fall of 2017 to start my early retirement.   A few important notes:  we are mortgage free and our goal is have our income/investment gains exceed our spending on a 12 month rolling average (please note this metric is still under development).

Investments

Accounts

RRSP $65,820
LIRA $17,960
TFSA $96,460
Pension $173,700
Wife’s RRSP $94,110
Wife’s TFSA $88,860
Wife’s Taxable $46,140
High Interest Savings Account $34,480

Investment Net Worth $617,530 ($4630 increase over last month from investments)

Home Equity

Estimate $395,000

Income

To keep things simple I’m only going to track what income comes into our main ‘house’ chequing account.  I won’t be tracking my wife’s or my businesses income as those don’t really matter until the money moves over to the ‘house’ account.  Also I won’t track investment gains since that is covered above.

  • Wife’s Monthly Payment to House: $712
  • Child Tax: $341
  • Interest $30
  • Total Income: $1083

Our Child Tax Benefit went up slightly starting in July and my wife owed a bit more to cover her liability insurance which is included in our house insurance policy which we paid last month.

Spending

Last Month $3824

Ugh, that was WAY more expensive of a month than what I wanted. But in all honesty it included several one off expenses like my tent broke and we had to buy a new one ($325), our car finally got fixed from a hit and run so we paid our deductible ($700),  we took vacation (~$550) and my wife and I did a special overnight trip to Saskatoon to celebrate both of us turning  40 in the last year ($250).

Then to top it off I broke down and took part of a Kickstarter for Reaper Bones 4 miniatures for our D&D game for $244.  Which seems like a lot but I am getting 172 minis in 2019 so the average cost works out to $1.42 per mini which is cheap compared to the $8 for two you pay at a local store.  In essence I just did all my game shopping for the next two years all at once.  The trade off of this decision is I’m parking my all grain beer brewing equipment purchases for several months to balance things out.

Results

Net Worth ~$1,012,530

This Month Investment Gains & Income/Spending Ratio = (4630+1083)/3824 = 1.49 (Target 1 or higher)

Sept to July Invest Gain & Income/Spending Ratio = (17669+17472)/34709 =1.01

Just a note on the multiple month ratio I stripped out all income related to my old job from the early months to provide a more realistic picture for retirement.

Commentary:

Okay I’m officially I’m fine. Our multiple month ratio shows our income  just over our spending for the last 11 months.  The concerning part to me of those numbers is our spending is pushing $35,000 and I still have one more month left which is bit higher than my planned spending (which was ~$32K).  Partly I know the reason for that is the $32K target didn’t include vacation spending and we had some odd one off things in the last year (eg: new tent and new glasses for my wife).  So the plan for August is very simple.  Keep our spending down for the month to try and bring the numbers back in line.

I should also mention when I modeled our retirement for the next five years I knew the first year contained the most risk.  At best I was to keep the net worth about the same over the year and depending how bad the markets did I could have seen a small loss.  But in 2019 things will turn around as our Child Tax Benefit will spike in July 2019 and I should see more income from my projects.

Any questions?

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What’s The Point of a Vacation When You are Retired?

I recently got back from a camping trip to Clear Lake over in Manitoba and it occurred to me that some of you might be wondering what exactly is the point of a vacation when your retired? Well the reasons vary a bit but I’ll try to touch on what I think some of the obvious ones.

First off in our case, my wife still works so she actually really does want a vacation each summer. Also frankly if I looked after kids all day every weekday during the year I would need more vacation than she takes. After all one of the major purposes of a vacation while you are working is to take a break from the stress of work. You know the entire relax and recharge idea.

In my case, I don’t really need a break from the stress of my life (frankly there isn’t that much to escape from), but I still enjoyed our vacation. Why? Because it is a break from your everyday life. It’s a chance to see new things and enjoy some time with those you are traveling with. I enjoy it because it is a break from my everyday sort of life which I think is important for everyone regardless of if your retired or not.

Now the other thing about being retired and traveling is you actually have some additional options open to you because you don’t have a set amount of time you can use for vacation. Effectively you are more limited by your travel budget than your vacation time. Which means you can take an option of renting an apartment for a month or two if you want and really spend some time in the region of the world where you are vacationing in. For example, if you wanted you could pick a country in Europe and make it home base for a while while you check out a number of countries near by. Alternatively you can split up your time and spend a few weeks in several spots or what ever combination of things you want to do.  Like I said, your options are more limited by money than time.

Of course, I’m not there yet. My wife still has a business to run so we typically limit ourselves to two weeks during the summer and another week around Christmas time. Also a lot of our vacations tend to involve camping as it is something both us and our kids like to do so we don’t actually spend all that much money on trips most of the time. But of course we do make exceptions like a few years back we did a big tour around the East coast of Canada where we took a month off and we are planning a trip to Disney coming up next year.

So what do you like most about your vacation?

A blog about early retirement and happiness