I'm trying to figure out what is the best way to supplement my RRSP for retirement. In Canada, I can contribute roughly 18% of my annual income (up to an annual maximum of about $26,230.00) without having to pay tax on that income. When I withdraw it, I pay taxes at my marginal tax rate at the time of withdrawal, with the marginal rate likely being lower as I would be (hopefully) retired.
Since I can max out that contribution, I want to supplement that amount while legally minimizing my tax exposure. One such vehicle for that is a Tax Free Savings Account (TFSA), which allows me to deposit up to $5000.00 per year of already taxed income. The upside, is that any interest accrued in that account is free of any taxation (neither capital gains nor personal tax is applied to it). Also, since I haven't contributed to one before, I can currently invest $50,000.00 to make up for past years where I did not contribute to such an account.
I went to the bank to decide what kind of investments are available for the TFSA, and what kind of risks/benefits they provided. The choices seem like garbage, to be honest:
- "High interest" savings account: 0.5% annual interest. If I put in $50,000.00, and invested the full $5000.00 per year, after 30 years I only gain a few thousands dollars in interest, and the real value of the amount has likely decreased due to inflation. The only benefit is no risk.
- GIC: The best rates are 9% over 5 years, but the cash is locked in (not a problem in my case), but I have to put all the money up front, and can't "top up" the investment every year. Also, 2% per year is still low. No risk at least.
- Mutual funds: The current funds I'm looking at are part of a "diversified portfolio" offered by the bank, which has had an 8% return over its entire lifetime. Correct me if I'm wrong, but that means that I'll never (likely) get more than 8% on top of whatever I invest.
What has me a bit confused is the mutual funds. They seem to have no compounded interest effect, so over the entire lifetime of the investment (assuming 8% remains true, I know it won't in real life), I just get my investment back plus 8%.
Is there something I'm missing here? Is there an option other than hiring a stock broker that gives something better than 0.5% per year for long term investments that I can regularly "top up" instead of providing a giant lump sum up-front? I'm trying to find a relatively low-risk investment that will double my principle (ie: my growing annuity I deposit to my TFSA) by the time I retire.