For many people, the magic number for a comfortable retirement is one-million dollars—but that amount can seem pretty daunting, especially if you’re already in your 40s.
So how can we get there by the time we are 65, even if we haven’t started yet? Here are some tips:
Forget about “saving”
You absolutely cannot “save” your way to a million-dollar retirement. Understanding this is one of the first steps to financial literacy – which is appropriate, as November is Financial Literacy Month in Canada. Here’s why:
- A recent survey of the market showed that the highest rate paid was around 2.4%, while the lowest was, believe it or not, 0.03%! This kind of return will not help you save a million dollars – even over 20 years.
- Taking inflation and taxes into consideration, with a 2.4% annual rate, a $100,000 savings account will shrink to $88,000 in 20 years!</li
Control your spending
Spending vicariously is one of the biggest challenges to getting your financial house in order. And the devil’s in the detail. For example, if you’re a lunch buyer rather than a brown-bagger, you’re paying an average of, say, $10 a day. At that rate, if you buy your lunch just three times a week, that adds up to $1,500 per year! Tack on $30 a week for those irresistible lattés and you’re down another $1,560 a year. That’s about $255 a month. Combined, that’s $3,060/year at a minimum.
Give up the lattés for a year, brown bag it more often, and save that $255 per month for 19 months, you’ll have saved up over $5,000! Put your $5,000 into a high-performance investment fund earning, say, an average annual 9.5% and continue to contribute $255 per month for 25 years, that money will have turned into $366,577!
Create your financial roadmap
To get on the road to financial success, you have to get off the road to ruin. If you don’t know you own, what you owe, what you really earn (after taxes), what you spend, and how much you have left at the end of the month, that signals financial trouble for your future.
Begin by deciding where you want to be in 20, 25, or 30 years. Next, decide on a strategy – that’s the tool that will let you achieve your long-term goal. If that sounds like a lot of work, it is so invest in a financial planner.
Use your plans
Another great option is a Tax-Free Savings Account.
- You can contribute as much as $5,500 per year with no income test needed
- Investments grow tax free and withdrawals are also tax free
- Keep in mind, you won’t get a tax deduction
Combined, your RRSP and Tax Free Savings Account can get you to that $1-million goal by the time you celebrate your 65th birthday. Here’s how:
- If you start contributing just $770 a month to an RRSP at age 40, and target an 8.5% average annual compounded return, your RRSP will be worth $794,000 by the time you reach 65.
- Then, if you contribute your annual tax refund from your RRSP contributions, say, $3,228, into a Tax-Free Savings Account earning the same return, you’ll have an additional $254,000 at age 65.
- Add that together, and you’ll have over a million bucks!