Planning financially for the far future via TFSA

Since last year, Canadian government has introduced Tax-Free Savings Account (TFSA) to encourage its citizens to save. We (any one holding a social security number and over 18) are allowed to contribute $5000.00 each year to a TFSA. Investment income earned in a TFSA is tax-free. Unfortunately, contributions are not tax-deductible.

I just did some tabulation and found out that if you contribute the maximum amount annually for 40 years and assuming you earn 5% return yearly and the interest is added back to the principal, after 40 years you shall have $634,199.00. Of course we do not know the value of money after 40 years.

What I have decided to do for the TFSA is to buy dividend paying stocks (only Canadian stocks are allowed) with yield at 4.5% or over. Assuming the price of the stock can keep up with the inflation, then after 40 years I shall have $634,199.00 in today’s value. Wow! That shall keep me fed till I die. The down side – stocks can go to zero. Since only Canadian stocks are allowed, diversification (among stocks yielding 4.5% or over) might be difficult.

The thing about the compounded interest is that you have to have a very long time span. With the above number, after 20 years you only accumulate $173,596.00 which does not look very attractive.

There is a saying that you should live as if you were to die tomorrow, dream as if you were to live forever. How about financial planning? I think that I will take the middle road, plan financially as if I am to live till 105.