alison griffiths articles
Alison's Money Rule
Can you be a millionaire by 65?
Posted November 28, 2011
Originally Published February 28, 2011
Want to be a millionaire before you retire?
Who wants to be a millionaire? Who doesn’t? Though the number one, followed by six zeroes, doesn’t buy what it used to, the word millionaire still connotes luxury and ease. And while billionaires are the new normal for wealth, somehow that million dollar figure remains a pinnacle most would like to scale.
However, a TD Canada Trust poll released February 5 found young Canadians pessimistic about their ability to retire with a million bucks. In fact, 75 per cent of those aged 18 to 34 did not believe they would achieve that savings level. A third of respondents felt their best chance at a million was by winning the lottery. Sadly, only one in ten thought they could ever save that much.
Part of the problem, according to TD, is that 18 to 34-year-olds overestimate how much they need to save to become millionaires. Sixteen per cent think it would take savings of $1,000-$2,000 per month and the same number believe they would need to sock away $2,000 or more monthly to reach the millionaire pinnacle. The remaining 22% don’t believe it would be possible to accumulate one million dollars through personal savings alone.
Au contraire, says TD. "Start now,” emphasizes Carrie Russell, senior vice president, TD Canada Trust. “Save monthly. Increase your regular RRSP contributions as your salary increases. While there is no reliable quick win for getting rich, these three steps can help get you on your way to retiring comfortably… and maybe even a millionaire."
Here’s TD’s route to a million.
Age Savings per month
25 to 30 $100
30 to 35 $250
35 to 40 $500
40 to 50 $750
50 to 65 $1,000
*(TD Canada Trust’s chart assumes savings are contributed to an RRSP account and earn a 6.8% annual rate of return, compounded monthly.)
While I’m all in favor of saving I have a few quibbles with TD’s thinking.
1. Why $1 million? Is this what TD thinks this group will need to retire 40 years hence?
While the figure is a great strategy to grab attention and, presumably, encouraging the young to save now and save often, lives are vastly different across this country and throwing out a magic number implies this is what twenty-somethings need to aim for if they want to retire.
2. The 18 to 34 year group faces some very serious financial problems, not of their making.
According to Statistics Canada, employment income for 22 to 34–year-olds has decreased relatively, regardless of education, over the past two decades. At the same time, the cost of living, especially education, has increased dramatically.
It’s a pretty simple recipe for disaster -- less money chasing greater expenses. And the result is debt. On Feb 17, the Vanier Institute of the Family estimated the average debt load for university students with an undergraduate degree was $18,000. The real debt story could actually be worse as increasing numbers of parents take out lines of credit to help pay for their children’s education.
A September 2009 survey by the Canadian Payroll Association found that two-thirds of Canadians 18-34 would find themselves in trouble if their pay cheque was delayed by only one week.
High debt, fewer jobs and lower income delays when and how much this group can start saving.
The situation is so serious a new trend has developed to cope with it. Nearly a third of parents with a youngest child aged between 20 and 34 years old, have at least one offspring living at home with them, according to a recent Statistics Canada report. Twenty-five per cent of this group are boomerang kids who have returned to the parental nest after departing one or more times. The remainder, who never left home at all, “failed to launch” the Stats Can wits say.
In the face of these statistics the idea that young people simply have get cracking to hit the one million mark at 65 is simplistic. Many are struggling just to keep their heads above water, never mind saving.
3. Setting aside $750 monthly in the 40 to 50 age group seems overly optimistic.
Those with families and few workplace benefits -- an increasingly common phenomenon -- will find this decade laden with high expenses as children mature into the teen years and then head off to higher education.
4. What happened to save 10 per cent of what you make?
The TD route to becoming a millionaire bumps savings to $1,000 a month for the 50 to 65 group. Possible if you’ve got a good job, aren’t still supporting children or looking after elderly parents and have little or no debt. That’s a lot of ifs.
The average working Canadian makes just under $800 weekly, it’s a bit of a crude measure since it also includes part-timers. That puts an average annual income at nearly $42,000 a year. Saving $1000 a month between 50 and 65 represents nearly 30 per cent of gross income.
No one can argue with the value of savings, but I think TD Canada Trust’s projections are unrealistic (not to mention depressing) for a group who are off to a difficult financial start.
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