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portfolio strategy

TFSAs were launched in 2009, which means we’re well into our 10th year of having them available to build tax-free wealth.

Care to benchmark your TFSA to see how you’ve done over the first decade for this popular investing and savings vehicle? Globe reader T.J. Machado of Mississauga recently asked for help on this. “For someone who has been maximizing TFSA contributions since the onset and investing without hitting for the fences, what would be a reasonable balance?” he asked.

A quick answer to this question is $71,145 by year’s end. If you’re an aggressive investor, $88,311 is a reasonable amount to have at the end of the year. Using your tax-free savings account to hold your savings? Then $60,967 is a fair target.

Digging into these numbers will help you gauge your own progress with your TFSA and give you some ideas on how to benchmark your other investments as well. To start, let’s set 4 per cent after fees as a reasonable annualized rate of return for a balanced portfolio over the past 10 years.

That’s basically the average return for balanced mutual funds with a tilt toward Canadian stocks for the 10 years to April 30, and it’s close to the 4.4 per cent annualized 10-year return for one of the benchmarks used to gauge the performance of this type of balanced fund – the Fundata Canadian Balanced-Equity Focus Index.

Funds in this category tend to have roughly 60 per cent to 80 per cent of their assets in stocks and the rest in bonds or cash. If you have a higher weighting in bonds in your own portfolio, your TFSA will likely have grown less. Higher weightings of stocks offer the potential for somewhat higher returns, especially if you’re a skilled investor.

A good many investors – both individuals and pros – can’t regularly beat the returns of major stock and bond indexes on an after-fee basis. But elite TFSA investors do exist, even if they’re rare. Canada Revenue Agency data show there were 30 TFSAs with a fair market value of $1-million or more in 2016, and 120 with balances of $500,000 or more. There were 18.3 million total TFSAs at the end of 2016, which means the accounts worth more than half a million dollars accounted for just a tiny sliver of the total.

Pay no mind to these particular numbers if you use your TFSA for savings. There’s a tendency to disrespect people who keep savings in a TFSA because they forgo the opportunity to generate much better returns on a tax-free basis. But having a maxed-out TFSA based on a zero-risk savings account has its benefits in making you instantly ready for any sort of major financial emergency.

To benchmark the returns for a savings account TFSA, let’s use prevailing interest rates over the past 10 years for a mainstream high-interest savings account and, again, assume you made the maximum contribution every year. The online interest rate history for the online bank Tangerine offers a guide to where rates have been since 2009. On average over the past 10 years, rates from accounts like Tangerine’s have roughly averaged about 1.4 per cent.

Better rates were available on savings over that period, but there was also a lot of money in accounts that paid less. The Canadian High Interest Savings Bank Account website shows that the best savings account rate for a TFSA as of late this week was 2.1 per cent at Alterna Bank and Hubert Financial. Several others offered 2 per cent or 2.05 per cent.

For the aggressively invested TFSA, an all-stocks portfolio with an annualized return of 8 per cent was used as a benchmark. The S&P/TSX Composite Total Return Index (share price changes plus dividends) averaged just 4.2 per cent for the 10 years to April 30. However, the S&P 500 index averaged 11.7 per cent in Canadian dollars for the past decade. A 50-50 mix of Canadian and U.S. stocks would have given you an average of just about 8 per cent.

Many investors have had success with dividend stocks in the 10 years that TFSAs have been around. One dividend benchmark to use for measuring your TFSA is the S&P/TSX Canadian Dividend Aristocrats Index, which produced an annualized 10-year return of 6.9 per cent to April.

If you haven’t made the maximum contribution to your TFSA every year, you have lots of company. CRA’s latest tally shows the average value of TFSA accounts was $13,000. Cumulative total unused TFSA contribution room since inception was $554-billion, while total contributions amounted to $311.7-billion. Withdrawals totalled $107.4-billion.

Year-by-year TFSA numbers suggest that only about 5 per cent to 10 per cent of TFSA holders make the maximum contribution every year, and that the percentage of TFSA holders who maximize their contributions rises as people age. In 2015, 19.3 per cent of people contributed the maximum in the 75-and-over age group, compared with 17.6 per cent for 70 to 74, 16.3 per cent for 65 to 69 and so on. The 75 and older group also had the highest number of TFSA holders in any age bracket.

The CRA numbers show a large number of people open TFSAs, but don’t add money every year – in 2015, there were just more than seven million TFSAs with no transactions. To build your TFSA over the next 10 years, worry less about what investments you use and more about setting up a regular contribution plan. Consider setting up automatic electronic transfers every payday from your chequing account to your investment account.

Whatever investments you choose, make low fees and commissions a priority. If you’re like Globe reader Mr. Machado and “investing without hitting for the fences,” then you should expect returns in the same 4-per-cent zone as we saw in the past 10 years.

Investment return guidelines prepared for use by financial planners suggest using 3.9 per cent as an annual return for a balanced portfolio after fees and 4.7 per cent for what is described here as an aggressive portfolio. Balanced is considered to 50-50 stocks and bonds, while aggressive is 75-per-cent stocks and 25-per-cent bonds. With subdued expectations such as this, fees have a big impact on your net returns.

How's your TFSA doing?

Use this chart to benchmark the value of your tax-free savings account. It's assumed here you've made the maximum annual contributions since the introduction of TFSAs back in 2009.

YearAnnual Max TFSA Contribution*Cumulative TFSA RoomHigh Interest Savings Account at prevailing interest rates**Balanced portfolio of stocks and bonds with net annualized returns of 4 per centGrowth portfolio of stocks with net annualized returns of 8 per cent
2009$5,000 $5,000 $5,085 $5,200 $5,400
2010$5,000 $10,000 $10,226 $10,608 $11,232
2011$5,000 $15,000 $15,455 $16,232 $17,531
2012$5,000 $20,000 $20,731 $22,082 $24,333
2013$5,500 $25,500 $26,585 $28,685 $32,220
2014$5,500 $31,000 $32,502 $35,552 $40,737
2015$10,000 $41,000 $42,927 $47,374 $54,796
2016$5,500 $46,500 $48,814 $54,989 $65,120
2017$5,500 $52,000 $54,803 $62,909 $76,269
2018$5,500 $57,500 $60,967 $71,145 $88,311

Source: Rob Carrick

*Contributions assumed to have been made Jan. 1 of each year / **Rates offered on a mass market high interest savings account (they ranged between 0.8 and 1.5 per cent over the past 10 years or so / Note: Three highlighted columns show end-of-year account value