An individual who is able to take full advantage of TFSAs may have his first million by age 54. First in a series by Lawrence Solomon for the National Post.
Finance Minister Joe Oliver took Tax Free Savings Accounts to a new level in this week’s budget by almost doubling the amount that those 18 and older can contribute, to $10,000 per year. Apart from the immediate financial advantage of being able to save — and invest — money tax free, he has unleashed a long-term social revolution that enables almost everyone who wishes it to become a millionaire.
Canadians as young as 18 will now have a powerful incentive to save rather than spend, spurring the work ethic and a more self-reliant society. An individual who is able to take full advantage of this opportunity, and averages an annual 5 per cent return on his investment — a modest return on blue-chip stocks — would have his first million by age 54, his second by age 66 and his third by age 74. If the return only averaged 4 per cent, the first million wouldn’t come until age 58. Married couples would have tax-free nest eggs twice that size, such households having reached their million-dollar milestones in half the time.
TFSAs counter income inequality, giving new meaning to the narrative of the 1 per cent. With starting salaries for skilled tradesmen often topping $40,000 a year, and much more with overtime, those who opt out of college for an earlier entry into the workforce would have a jumpstart on becoming millionaires over those who decide on a college degree. Becoming a millionaire, and the status that this implies, isn’t on the radar of most tradesmen today. TFSAs will change the culture, bringing the dream of becoming a millionaire to the masses as they realize this dream is within easy reach. Without TFSAs, the ability to become rich at a young enough age to enjoy it would be remote — the first million in investment income would more likely come in at age 67 or 70 rather than at 54, explaining why the effort today is for many not worth the candle.
The culture will also change by discarding much of the baggage that now burdens people entering the workforce. A university degrees doesn’t suit everyone — to the many not academically inclined, it represents several lost years of going through the motions of becoming educated for the sole purpose of avoiding the stigma of not having a college education. As the public begins to recognize that the path to financial success needn’t begin with post-secondary school education, the skilled trades will be held in higher esteem, as they were a generation or two ago. Those who don’t belong in university will tend to enter the workforce in their teens, as most historically have, motivated by the opportunity to perform work that they’re good at, and that will reward them with affluence and the status that accompanies it.
Even those in lower paying occupations, who aren’t highly skilled and who don’t have an entrepreneurial bent, would be able to become millionaires, although it would take them longer, and they would often need to hold down a second job. But it would be within easy reach for those who are determined. To be able to set aside $10,000 a year — or $30 a day — a waiter might need to work an extra two, sometimes three, hours a day.
The TFSA sheds light on the extent to which government taxation deprives average Canadians of their right to affluence. While some might see the TFSA as a tax subsidy, it is in fact merely the result of a government swearing off its claim to the subsequent income from a mere $10,000 a year that individuals have already earned — by giving Canadians this tiny space of their own, they are able, if they wish, to grow it to a large measure of financial freedom, along the way reinforcing values such as self reliance and maturity — the norm in youth before our nanny state culture left them infantalized and government-reliant.
Of course, people can and do become millionaires without TFSAs, and even with TFSAs, most won’t be able to set aside a full $10,000 in the early years of employment, and many if not most, even in later years, will not want to put in the effort required to realize the dream of becoming a millionaire. What TFSAs do is change the income-inequality balance, making it seem less like the preserve of the 1 per cent, whose success is perceived to come at the expense of the 99 per cent, and more like a willing choice made by the perhaps 50 per cent of the population that is focused on becoming affluent versus the 50 per cent whose personal priorities lie elsewhere.
TFSAs will make income inequality less an economic issue of a system that’s seen as stacking the cards against the little guy and more a private matter, of people choosing to get rich or not.
First in a series. Next: How TFSAs can transform family values and Canada’s demographics.