How Hard is it to Save $1 Million?

How hard is it to save $1 million for retirement? To answer that question, we have to look at a number of variables such as interest rates, number of years to retirement, etc. But the net result is that it may be easier than you think.

No matter what rate of return you are able to earn on your investments, the simple truth is that the earlier you start the better. Let’s assume that your goal is to have $1 million in your portfolio when you reach age 65, you increase the amount you put in each year based on inflation (we’ll call it 2%/year) and that your investments grow at 6% per year. The amount you will need to put away will depend entirely on your age:

* An 18-year-old would need to invest $56 per week or $2,919 per year
* A 25-year-old would need to invest $90 per week or $4,672 per year
* A 35-year-old would need to invest $185 per week or $9,597 per year
* A 40-year-old would need to invest $274 per week or $14,233 per year
* A 50-year-old would need to invest $691 per week or $35,915 per year

Younger Canadians certainly find putting money aside for retirement hard with entry-level wages, student loans and the high cost of living but the numbers don’t lie. It is substantially easier to reach your retirement goals when you start saving at an earlier age. But if they stick to a budget and setup an automatic weekly or monthly withdrawal, they likely won’t even miss the money being set aside. Although they may feel like their budget is pretty tight, the majority of 25-year-olds can put away $90 each week if they make that goal a priority.

Ideally, those with moderate incomes will put this money away in their TFSA account so that the $1 million nest egg they amass will be completely tax free.

Although there are lots of people out there not earning 6% per year on their investments, it’s really not that hard to do. A quick look at Fidelity’s “Balanced Private Pool” which is a one fund solution for many portfolios (and one of our largest holdings here) shows an average return of +9.68% per year over the last 5 years. If you were to take the above example of a 25-year-old who needs to put $4,672 away per year to reach $1m and had them earning 9% per year, they could reach their $1 million goal by only putting in $42 per week instead of $90/week.

Or, the same 25-year-old could stick to the $90/week investment goal and have a whopping $2.1 million in their investment account when they reach age 65! So yes, in addition to starting early the quality of investment management you select is also very important.

So, there you have it. Saving $1 million is not that hard to do if you invest it properly and start early. Even if you can’t put away the full amount required each week to hit your goal right now, starting with any amount today will get you closer to being on track for the stress free retirement you deserve.