I never did give myself a concrete goal like a million dollars by retirement before, but the study did intrigue me....Could I save a million dollars? I ponder if this is even possible giving the fact that life just gets in the way: markets crash, babies are born, kids need dental work, cars break down, homes need new roofing and furnaces, another baby is on the way, people lose their jobs... while saving $100 or $250 isn't a problem for most people but considering most are swimming in debt as the Vanier Institute opines: people are spending $1.50 for every $1 earned after taxes; hence how is it possible to save $750- $1000 per month for most of us? Also consider this, a 2009 Canadian Payroll Association study found 2/3 of all Canadians would find themselves in trouble if they lost their job and missed their paycheque by one week.
Now, how about a person like myself? I try to live frugally but I don't have the 40 year time frame anymore to save that kind of money as TD suggests. People like me spent the last 10 years trying to tackle our debt levels and mortgage; in fact, most people my age group are still within 10-15 years away from paying their mortgage off nevermind paying off their consumer debt. So is it still possible to save a million dollars in less than 20 years?
And, how easy is it to find an investment to earn one a return of 6.8% annually, compounded monthly? I asked this question to a professional financial advisor and she said it wasn't impossible but isn't advisable as I would have to take on quite the risky portfolio to earn something that high of a yield.
A recent Moneysense article claims this is not an impossibility and can be achieved with a balanced portfolio of stocks and bonds. Another Moneysense article points out two possible scenarios to achieving the million dollar goal: one with annualized returns of 6% and ultra-conservative $3.5% using up all one's RRSP contribution room.
Yes, considering average returns of the general stock market has been 9%-11% is how Moneysense based their opinion but, the authors also tend to forget one starting out saving and investing does not do this for free.. most banking institutions charge annual fees and transaction fees as do mutual funds companies; another part of life that gets in the way. In addition, how does one rebalance and reinvest their returns into their portfolio every month in order to capitalize on the monthly compounding that is needed without incurring large transaction costs?
What I do agree with TD and Moneysense is you do need time and yield, and the more you can save the better; the power of compound interest will take care of the rest. The more you save, the more you can invest; the more you invest the faster you can achieve your million dollar goal.
The chart below shows how many years it would take to reach a cool million. The higher the rate of return, the higher amount of risk you would have to take, but obviously the faster it would take. But if you can SAVE more per month, earning a lower yield in a safer investment can get you to your million dollar goal in less time than earning a higher rate of return.
Years To Reach One Million Dollars
| Monthly Savings | 2% | 4% | 6% | 8% | 10% | 12% | 14% | 16% |
| $50 | 177 | 105 | 77 | 61 | 51 | 44 | 39 | 35 |
| $100 | 144 | 88 | 66 | 53 | 44 | 39 | 34 | 31 |
| $150 | 125 | 79 | 59 | 48 | 40 | 35 | 31 | 28 |
| $200 | 112 | 72 | 54 | 44 | 38 | 33 | 29 | 26 |
| $250 | 102 | 67 | 51 | 42 | 35 | 31 | 28 | 25 |
| $300 | 94 | 62 | 48 | 39 | 34 | 30 | 26 | 24 |
| $400 | 82 | 56 | 43 | 36 | 31 | 27 | 24 | 22 |
| $500 | 73 | 51 | 40 | 33 | 29 | 25 | 23 | 21 |
| $750 | 58 | 42 | 34 | 29 | 25 | 22 | 20 | 18 |
| $1,000 | 49 | 37 | 30 | 25 | 22 | 20 | 18 | 17 |
| $1,250 | 42 | 32 | 27 | 23 | 20 | 18 | 17 | 15 |
| $1,500 | 37 | 29 | 24 | 21 | 19 | 17 | 16 | 14 |
| $2,000 | 30 | 25 | 21 | 18 | 16 | 15 | 14 | 13 |
| $2,500 | 26 | 21 | 18 | 16 | 15 | 13 | 12 | 12 |
| $3,000 | 22 | 19 | 16 | 15 | 13 | 12 | 11 | 11 |
| $4,000 | 17 | 15 | 14 | 12 | 11 | 10 | 10 | 9 |
| $5,000 | 14 | 13 | 12 | 11 | 10 | 9 | 9 | 8 |
Reading from the chart, it would take one 51 years to acquire a million dollars if they saved $50 per month and earned an annual return of 10%. For me, if I was starting out now, and have 17 years to retire, I could save $1000 per month but would need a 16% annual yield; what is interesting is if I upped my savings to $4000 per month and stayed with a more conservative portfolio giving me a return of only 2%, I could still achieve my million dollar goal in 17 years! The key here for people like myself who don't have the time frame is being able to SAVE MORE.
At 25, I felt I had all the time in the world to save; at 35, I thought I was easily on my way being better off than most of my peers paying off my long term debt; when I hit 40, I realized I only had 18 years left to achieve my retirement goals (I intend to retire at 58 not 65). And, with my recent look at our household monthly bills, I found that my mortgage payments I once had has been totally swallowed up by the increases on our utility bills and not going towards savings at all as I once thought. So at 41, what do I do now?
I DO believe saving a million dollars IS possible but not as easy nor is it on autopilot as TD Canada Trust or Moneysense suggests it is. It takes hard work and discipline and commitment. And it takes money. How much? An interesting article 2 years ago by Wall Street journal writer, Jonathan Clements, suggests there is a certain threshold one needs to attain where the driver of most portfolio growth comes from investment returns instead of savings...
"This is the snowball down the mountain that turns into an avalanche. This 'certain level of assets' is often called critical mass--the point where you can't stop the money from growing. The growth comes from the compounding as the investments pay off" ... - Charles Farrell, Northstar Investment Advisors.
This amount is approximately double your pretax annual income assuming you are saving 12% of your gross income and getting an average annual return near 6%. In short, money makes more money. I reached that threshold this year... will I get to a million? ...we'll see how it goes....
But who says I need a million? To be continued....
