What the Typical 40-Year-Old Canadian Has in Their TFSA and RRSP

There’s quite a wide range of different breakdowns when it comes to the average 40-year-old’s Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). But, for the most part, my belief is that most of them aren’t in the optimal spot. Recognizing this and taking the steps to correct that, I believe, are what matters most.

Of course, circumstances, including the higher costs of living, could get in the way of achieving an optimal TFSA or RRSP growth fund. But for those who do have the means to save more and make the maximum contribution (or make up for past years of non-contributions), I think that it makes sense to get a plan in place. The sooner, the better, but investors should be practical and not seek to deprive themselves, especially when you consider the potential for inflation to heat up further in the coming months and quarters.

Contributing and investing is the name of the game

While it’s tough to know for sure what the typical 40-year-old’s TFSA or RRSP account actually looks like, I will look at a hypothetical example involving someone with, let’s say, $30,000 in the RRSP and around $12,000 in the TFSA. Indeed, these are closer to median figures than to an average, given the skew on the higher end.

Either way, though, the average 40-year-old has quite a bit more in the RRSP than the TFSA. And it’s the TFSA, which, I think, should make up for lost time, especially when you consider the cumulative contribution room is well north of the $100,000 mark.

When you throw in the FHSA, meant for prospective first-time homeowners, into the equation, things get that much more interesting. But for the most part, I think that this account is dwarfed by the TFSA and RRSP balances, with a median figure likely in the four figures.

Any way you look at it, though, it’s what’s on the inside that counts, especially for contributors who might find that it’s harder to save amid relentless price hikes at the local grocery store. Indeed, perhaps withdrawing from such accounts rather than contributing could be a theme if oil prices march higher, causing an inflation surge, all while employment looks to bounce back from a bit of a cool spot.

Catching up with the TFSA

In any case, 40-year-olds have plenty of time to catch up, given they’re around 25 years away from the average retirement date. For the typical TFSA investor who has too much cash in the TFSA (let’s say more than 40%), there’s an easy fix. While the RRSP is likely to be in an equity or bond mutual fund of some sort, it’s the TFSA that’s fallen into a “cash trap,” so to speak. Either because it’s referred to as a “savings account” that’s tax-free, a lack of employee matches as some lucky RRSP investors get, or something else.

In any case, the TFSA isn’t just for cash to sit there and collect dust; it’s a solid investing account to help compound wealth. Whether you’re looking for American Mag Seven stocks or something as simple as Enbridge (TSX:ENB), with its 5% dividend yield, I think that more Canadian investors should take a careful look at their asset allocations across the board.

In my view, 40% or so in cash within a TFSA is just too much for someone who’s got decades to invest and build wealth. While Enbridge and other dividend heavyweights may be a bit pricey, I think that staying invested is key, especially as the affordability crisis worsens. A 5% yield or so will really help, provided you’re willing to take on the added risks of being more heavily exposed to equities.

The post What the Typical 40-Year-Old Canadian Has in Their TFSA and RRSP appeared first on The Motley Fool Canada.

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More reading

• TFSA Income: 2 Dividend Stocks to Hold for the Next 20 Years
• TFSA at 60: 2 Dividend Stocks to Help Any Canadian Catch Up
• 2 Dividend Stocks That Look Built for the Rate Pause
• How to Use Your TFSA to Average $1,500 per Year in Tax-Free Passive Income
• Enbridge: Buy, Sell, or Hold in 2026?

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.