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The Million Dollar Question

Updated: Apr 26, 2023

This commonly-cited retirement figure doesn't have to be intimidating

A million dollars.

That’s the number that seems to come up a lot when talking about how much you need to save for retirement. I’m going to be honest right up front: there’s a good reason why this number is bandied around and that’s because it’s sometimes true.

Unfortunately, the $1-million figure can result in a mental block that causes people to feel completely discouraged. As a client recently said to me, “The number seems so big that I just shut down.” That’s understandable – a million dollars sounds like a huge number.

We use the term “millionaire” like it’s grandiose and unattainable. Is it really, though? A million dollars isn’t what it used to be. The term “millionaire” has been used throughout my lifetime to mean someone who is super rich. Does that really mean the same today as it did all those years ago? When I was 20 years old (in 1994), a millionaire had a million dollars. Today, because of price inflation, that million dollars needs to be $1.8-million to have the same value. But we don’t say “I wish I was a $1.8-millionaire.” The reality is that a million dollars isn’t as exclusive as it was 20 years ago.

That’s not to say that accumulating a million dollars comes easily - it’s still a lot of money. But it is totally attainable, even for people earning an average income. Let me show you a few ways to get to a million dollars.

First of all, when accumulating a million dollars you’re going to need some help from the stock market. Savings for retirement need to grow at a rate higher than inflation. The long-term return of the North American stock markets has historically been about 8% per year, beating inflation. To set up yourself up to benefit from these potential returns, all you need to do is invest the money in an index mutual fund or an exchange-traded fund that mirrors the broad market. (I’ve written a lot on this topic like here and here.)

Assuming you do this and earn 8% per year on average and you use a tax-advantaged account like an RRSP or a TFSA, here is what will get you to $1-million at age 65:

Invest $3,500 a year from age 24 to 65

Invest $5,500 a year from age 30 to 65

Invest $12,000 a year from age 40 to 65

Invest $32,000 a year from age 50 to 65

Of course, the earlier you start, the less you need to save as you let the stock market do the heavy lifting for you, but even if you missed the boat at 24, you might still be able to achieve millionaire status.

But how realistic is it?

How realistic are these savings numbers? Quite realistic. Of course, everyone’s situation is unique and in some cases, saving is difficult due to onerous financial obligations, such as aging parents who need financial assistance or a disabled child who requires extra care. I don’t want to make it sound like saving is easy but for most people, it’s possible. With that caveat, let’s look at how realistic this is.

The average salary for a 25-to-34-year-old in Canada is $46,900, according to Indeed. So let’s start with assuming a $40,000 a year starting salary. If a 25-year-old saves 10% of their pre-tax income, that’s $4,000 a year. Let’s also assume they get a 2.5% raise every year and a 10% raise every 5 years as they advance in their careers. This means that their ending salary at age 60 is $64,000 a year (in today’s dollars). This is below the average salary for the 45-54 age group.

If they continue to save 10% as their income rises (and avoid lifestyle creep), at age 65, they are projected to have $1.8-million. To make it fair analysis though, we have to consider the fact that $1.8-million in 2064 is worth about $671,000 in today’s dollars – so not quite the million dollars. However, if they can save 15% of their salary, they would have $2.8-million at age 65, which is the equivalent $1-million in today’s dollars. As you can see, with even an average income, saving $1-million is possible.

Of course, this analysis is simplistic – there are many other factors to consider, especially the fact that people go through life stages. In some stages people can save more of their income and in some they have to save less. Some people are married and share the mortgage payments and the cost of kids’ summer camps, and some bear that burden on their own. My point though is that you don’t have to be earning big money to save $1-million.

The Late Bloomer

Let’s look at another scenario, one that’s more common than the bright-eyed 25-year-old who starts investing early. It’s not unusual for people at around the age of 50 to have little in savings. Saving hasn’t been a priority. Life’s been busy and expensive. Often they’ve been busy paying down the mortgage, buying endless pairs of kids’ running shoes, and taking the occasional vacation. Owning a home is a form of forced savings, so even though the RRSP isn’t big, the money they have invested in their home can be. It’s also common for the mortgage to be paid off sometime in their 50’s and when this happens in conjunction with the kids gaining financial independence, hello cash flow. Suddenly there’s $3,000 or more a month available to be saved. It’s time to sock away the money big time. Saving aggressively for a 10-year period can do a lot. Yes, you’ve missed out on the power of long-term compounding but there’s nothing you can do about that now – just save, save, save. $36,000 a year over 10 years grows to a little over half a million dollars. If there’s a lot of equity in the home, this might be enough for retirement.

Is a million the right number?

Definitely not always. There are a number of factors that play into how much you need to save like:

· How much you’ll get every year from the Canada Pension Plan and Old Age Security

· At what age you want to fully retire

· What kind lifestyle you want and how much you plan on spending

· Whether you have a lot of money invested in your home and what you plan on doing with your home

Your number might be less than a million so don't get too hung up on it. Shutting down, avoiding the issue and procrastinating on your financial planning will only make things harder in the long run, so find your number and get your savings plan set up now. Clarity equals peace of mind.


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