Who Says I Need a Million Bucks to Retire?

Following up on my query to save a million bucks by the time I retire, I ask do I really need that much and is it really enough by the time I retire?

In a recent TD Canada Trust poll, 3/4 of the respondents said it was unlikely that they would be worth $1 million by the time they retire and one third believed the only way they would have a million by the time they retire is by winning the lottery.....

An interesting question was posed on a friend's wall on Facebook a while back..."where will YOU be in 20 years?" Most people responded with answers like mortgage free, debt free, and retired; travelling and enjoying life; children done University and living on a remote island paradise or at least somewhere with a beach front.... So, most of my peers don't believe they will attain a million dollars in 20 years BUT believe by some miracle they will be still retired and travelling abroad... hence, it must be true that those who are retired or will retire in 20 years like myself believe a million must be more than enough; they will be happy and have successful retirements without a million dollars saved.

So then is the benchmark million dollars just " financial pornography" then, as financial advisor and blogger Jim Yih suggests? Yih opines financial porn is images or ideas of what retirement SHOULD BE like created purposely by financial institutions to sell their investments and retirement products. Yih postulates retirement should be personal and different for different people so there is no set number; there are many people living successfully in retirement that don't travel most of the year and you should be doing what you enjoy. Who came up with the notion you must have a million dollars to retire comfortably? Jim Yih says much of this is hype exists because of the financial industry and media.

If not a million then, how much is enough to retire on? If we think of retirement as just not having to go to work or relying on work for income instead of the dream of golfing everyday at Pebble Beach or lying around the beaches of Hawaii, it may be not as bad as we think.

A Moneysense article states a worst case scenario, retirement in 5 major Canadian cities costs only $20,200 to $27,400 to eke a bare bones living. Old Age Pension (OAS) and CPP and the Guaranteed Income Supplement (GIS) will actually cover all those basic need; we wouldn't have to save a nickel!! Hurray! BUT, bare bones living is hardly our idea of a successful retirement life is it? Most of us would want something over and above than just squeaking by....

According to a study by Statistics Canada, median spending by couples over 65 is $40,000 and average spending is $51,000 per year. So assuming most of your basic needs are covered by government programs, you would only need another $10,000 to $30,000 plus inflation for extra spending to enjoy an average to higher-end retirement. Using the rule of 4%, a quick standard for retirement planning (save $25 for every $1 needed in retirement income), that means having a nest egg of $250,000 for the median retirement to $750,000 for a higher end retirement! A lot less than the million dollar benchmark.

Still, many of us currently dealing with debt and 10-15 years left on our mortgages, how are they going to come up with $250K? Most of us are nearing 40 now if not already; by the time my peers' homes are paid off in full, they will be 55; hence they have 10 years to come up with $250K?? A daunting task indeed. Here's the problem with the Moneysense article and many other financial gurus' advice... you're supposed to save and save and save until you hit that magic number, then you draw down your savings by so many percent every year in retirement. What if you want to retire earlier than 65? No OAS or CPP yet... the earlier you retire, you draw down your savings quite a bit and may not have enough when you get to 65.

I think the answer lies in those who have retired early. More and more people are retiring early, in their 40's in fact without winning a lottery or hitting a big financial windfall inheritance. How?

They are able to replace their working income with passive income streams such as rental income and/or interest/dividend yields; which in turn pay all their monthly living expenses. An article on Canadian Dream: Free at 45 blog suggests a magic number of $2000 per month income. The author determined how much it would cost to live frugally each month with no mortgage and no debt and no "lifestyle" items such as vacations, toys, etc.; consulting with many retirees and those about to retire to see what their numbers were like and it came in around the same amount...$2000 per month.

Using this number of $2000 per month, how much money would I need to save and invest to generate this kind of income:

So if one was to buy a high yield dividend paying stock such as a bank or utility, it would give us a pretty good idea what we will need to save. For example, we buy Royal Bank (RY): pays out a 3.3% yield at $2.00 per share annually; I would need 12,000 shares of Royal Bank to get my $24,000 per year I need; at $59.59 per share as of Friday, it would cost me $715,080.00 plus commissions. Perhaps something with more yield like Bank of Montreal; 4.5% yield paying $2.80 per annum; I would only need 9000 shares at its current price of $61.73 costing me $555,570.00 to attain more than $2000 per month income. If you can handle more risk, buying a REIT or oil Trust may be to your liking... Riocan (REI.UN) pays out a $1.38 annual dividend for a 5.8% yield; costing $449,350.00 for 19000 shares. Enerplus Resources pays a dividend of $2.16 giving 6.9% return; costs $363,710.00 for 11500 shares and pays monthly $2070! A good asset mix of high yielding dividend stocks and income trusts should cost an average near $500K to generate a monthly income of $2000.00 then. The FinancialBlogger.com does a good look, updated all the time, at various Canadian dividend stocks here:

Ticker	Name	Price	Dividend Yield	Payout Ratio	Ex-Dividend
YLO	Yellow Media Inc	5.57	11.68	148.58	3/29/2011
ERF	Enerplus Corp	31.72	6.81	302.2	3/8/2011
TA	TransAlta Corp	20.55	5.64	146.33	5/30/2011
BCE	BCE Inc	36.02	5.47	74.18	3/11/2011
BMO	Bank of Montreal	61.96	4.52	58.75	4/27/2011
SLF	Sun Life Financial Inc	32.27	4.46	50.94	5/24/2011
SJR/B	Shaw Communications Inc	20.69	4.45	69.85	3/11/2011
T	TELUS Corp	48.15	4.36	62.09	3/9/2011
TRP	TransCanada Corp	39.04	4.3	90.38	3/29/2011
CM	Canadian Imperial Bank of Commerce/Canada	82.19	4.23	59.13	3/24/2011
ARX	ARC Resources Ltd	28.4	4.23	120.21	3/29/2011
RCI/B	Rogers Communications Inc	34.3	4.14	48.25	3/16/2011
HSE	Husky Energy Inc	29.97	4	86.96	3/21/2011
POW	Power Corp of Canada/Canada	29.36	3.95	80.79	3/21/2011
PWT	Penn West Petroleum Ltd	28.09	3.84	303.54	3/29/2011
NA	National Bank of Canada	74.86	3.53	41.4	3/22/2011
RY	Royal Bank of Canada	56.79	3.52	57.26	4/19/2011
FTS	Fortis Inc/Canada	32.99	3.52	85.61	5/4/2011
ENB	Enbridge Inc	58.05	3.38	67.29	5/11/2011
BNS	Bank of Nova Scotia	60	3.27	50.1	4/1/2011
TRI	Thomson Reuters Corp	38.32	3.19	106.56	5/18/2011
TD	Toronto-Dominion Bank/The	81.3	3	47.6	4/1/2011
MFC	Manulife Financial Corp	18.36	2.83	93.22	5/13/2011
COS	Canadian Oil Sands Ltd	30.05	2.66	101.13	5/18/2011
ECA	Encana Corp	31.58	2.48	39.36	3/11/2011
SC	Shoppers Drug Mart Corp	41.2	2.43	33.13	3/29/2011
CVE	Cenovus Energy Inc	37.75	2.12	60.52	3/11/2011
L	Loblaw Cos Ltd	39.53	2.12	34.36	3/11/2011
WN	George Weston Ltd	68.09	2.11	221.43	3/11/2011
MG	Magna International Inc	47.85	2.04	10.48	3/9/2011
CNR	Canadian National Railway Co	71.06	1.83	23.91	3/8/2011
CTC/A	Canadian Tire Corp Ltd	61.76	1.78	16.27	4/27/2011
MRU/A	Metro Inc	44	1.75	17.66	5/16/2011
CP	Canadian Pacific Railway Ltd	65.94	1.64	27.45	3/23/2011
BBD/B	Bombardier Inc	6.25	1.6	23.19	5/11/2011
THI	Tim Hortons Inc	42.79	1.59	14.5	3/3/2011
SAP	Saputo Inc	41.16	1.55	31.09	3/3/2011
BAM/A	Brookfield Asset Management Inc	32.96	1.54	21.67	4/27/2011
SNC	SNC-Lavalin Group Inc	56.24	1.21	25.22	3/16/2011
TCK/B	Teck Resources Ltd	53.75	1.12	6.34	6/10/2011
TLM	Talisman Energy Inc	24.11	1.04	62.38	6/1/2011
CCO	Cameco Corp	39.53	1.01	21.4	3/29/2011
GIL	Gildan Activewear Inc	31.1	0.95	0
YRI	Yamana Gold Inc	12.35	0.95	14.28	3/29/2011
ABX	Barrick Gold Corp	51.28	0.92	13.83	5/27/2011
AEM	Agnico-Eagle Mines Ltd	68.3	0.92	7.82	5/31/2011
SU	Suncor Energy Inc	45.66	0.88	22.73	3/2/2011
IMO	Imperial Oil Ltd	50.59	0.87	21.53	3/1/2011
G	Goldcorp Inc	46.41	0.84	11.12	3/15/2011
NXY	Nexen Inc	26.51	0.75	18.18	3/8/2011
K	Kinross Gold Corp	15.4	0.63	9.15	3/22/2011
CNQ	Canadian Natural Resources Ltd	48.93	0.61	14.43	3/9/2011
ELD	Eldorado Gold Corp	16.55	0.6	13.2	8/10/2011
POT	Potash Corp of Saskatchewan Inc	59.86	0.46	6.52	4/12/2011
IMG	IAMGOLD Corp	20.59	0.39	10.62	12/20/2011
FM	First Quantum Minerals Ltd	126.5	0.31	1.25	4/11/2011
IMN	Inmet Mining Corp	66.81	0.3	3.12	5/25/2011
AGU	Agrium Inc	92.12	0.12	2.33	6/15/2011
VRX	Valeant Pharmaceuticals International Inc	38.99	0	57.84	3/4/2011

Choose wisely and not only can those stocks generate a good monthly income for you but also you benefit from capital gains; much better than just simply drawing down your hard earned savings.

How many income generation stocks should you hold in your portfolio? Intelligent Speculator gives some advice on the topic here. I like to use dividend stocks and income trusts as an example for myself as I'm into those types of investments and believe passive income in retirement is the way to go. Whether or not you choose to buy stocks or invest in rental properties or start some kind of home-based business is entirely up to you and what kind of retirement lifestyle you want.

So do I need a million bucks? Everyone is different like Jim Yih says; "retirement is personal"; and goals are varying. I was told by a friend on Facebook that living "comfortable is a very subjective statement" (thanks Craig!).

So, for myself, the answer is NO.

I gave up my battle with the Jones' in my 20's.... I do have a pension.. currently it will generate $1600 per month if I quit my job tomorrow; by the time I retire at 58, I expect it to produce $3000 to $4000 monthly income; that is, if oil doesn't drop to $12 a barrel again in the next 17 years and leave me unemployed for very long. I would hope to have an above median retirement which includes golf and travelling so an additional $2000 per month income would be ideal; giving me a "subjectively comfortable" retirement spending guideline near $60,000 per annum plus inflation with no debt; no mortgage.

I shall still strive to save like my goal is a million bucks; try to live like I'm on Unemployment Insurance by trying to find savings in my monthly costs wherever I can; and invest enough to accumulate a good asset mix of stocks and other income generating instruments that will hopefully eventually replace the income I need from my job within 17 years. At least I can rest assure I won't need a million bucks to retire; I will just have to get used to the idea that I will be happily retired as a thousandaire...

Sounds like a plan. But now how am I going to pay for the kids' educations...? Sigh...

Saving a Million Bucks; is it even Possible?

A recent TD Canada Trust study released results of a poll of young Canadians aged 18-34 stating most believe their best shot at having a million dollars by the time they retire is by winning the lottery. TD on the other hand suggests the goal, though it may sound impossible at first, is very attainable if you have the time frame and compound interest on your side. TD suggests saving $100 per month at the age of 25 into a tax deferral vehicle like an RRSP or TFSA; increase the amount to $250 at age 30; $500 at 35; and $750 at 40; $1000 at age 50... retiring at 65, you should have saved a million bucks assuming an annual yield of 6.8% compounded monthly in 40 years.

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....