Itâs never too late to start saving for retirement. I believe you can build a sizable nest egg, even if youâre older than half of all Canadians and have never saved before. Hereâs how the average Canadian saver can turn a newly opened savings account into a six-figure cash cushion within 30 years.Â
Bare minimum strategy
I believe doing the bare minimum is enough to secure your financial future. That means adopting a simple strategy of maximizing savings, using government savings programs, and investing in a plain-vanilla index fund.
The first step is to maximize your Tax-Free Savings Account (TFSA). The average TFSA balance in 2022 is $32,234 while the maximum aggregate contribution room is $81,500. However, you can launch a new TFSA in 2023 and make your first contribution of $6,500 to get started if you havenât already done so.Â
Adding $6,500 every year to this account should help propel your savings. Meanwhile, you donât need to pick specific stocks or funds every year. You can simply invest in a traditional TSX index fund such as the iShares S&P/TSX 60 Index ETF (TSX:XIU). This fund tracks the 60 largest companies in Canada and has delivered a compounded annual growth rate of 7.5% since inception.
If youâre 41 years old or more, youâre older than half of all Canadians. That means you have 24 years before retirement. Investing your TFSA in an index fund over this period could turn $6,500 in annual contributions into $779,410 by the time youâre over 70.Â
Thatâs more than the value of an average home and nearly a million dollars! That’s enough to survive on.Â
If youâre looking for a more aggressive approach to saving for retirement, a dividend-growth plan could be better. Several Canadian companies offer steady growth in earnings and stock price and a reasonable dividend yield. If you reinvest the dividends to buy more stocks every year you can accelerate your investments.Â
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ) tracks several top Canadian companies that have expanded dividends consistently for years. These are usually heavyweights in the financial, banking, energy, or telecommunications sectors.Â
The fund has delivered a 6.74% CAGR since inception and currently offers a 4.3% dividend yield. Assuming dividends grow by an average of 6% every year and you adopt a dividend-reinvestment plan (DRIP), you could turn $6,500 in annual contributions into $1,246,809 within 30 years.Â
Put simply, you could go from no savings to a millionaire retiree with this simple plan.
Your retirement plan doesnât need to be complicated. Doing the bare minimum should help you accumulate $779,410 in your TFSA. Investing in a Dividend Aristocrat fund and reinvesting dividends aggressively could expand that to $1.2 million.
Itâs never too late. Get started!
The post How to Turn $6,500 Into $779,410 by the Time You Retire appeared first on The Motley Fool Canada.
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Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.