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Retiring Rich: Suburban Millionaire

October 14, 2010 by  
Filed under Ask the Expert


Retire a MillionaireYou can retire a millionaire. Yep, that’s right, a millionaire – without winning the lottery, either. A long time ago this was a dream reserved for the few and the fortunate, but income today is different from what it was 50 years ago. It certainly isn’t a rarity for seasoned veterans to make anywhere from $60,000 to over $100,000.

Of course, not everyone will make this kind of income, and according to a recent survey by the Canadian Payroll Association, 59 per cent of Canadian workers say they would be in financial trouble if they missed even a single paycheque. Such alarming numbers suggest long-term planning and saving is even more crucial for financial security. However, with some careful financial manoeuvering, consistently putting money into savings and avoiding frivolous spending, you too can achieve millionaire status.

In your 20s, life is just beginning; many 20-somethings are just finishing school and taking that first step in a career.

It may seem like an odd time to start planning for retirement – especially with that massive student debt – but it’s actually the perfect time. Starting early means more time to handle risk down the road and it helps to manage spending in a responsible way.

By starting a regular savings plan – and sticking to it – you will be able to capitalize on the power of compounding. Start small: $100 – $200 a month is a good range, and it may be a good way to help budget your income. Saying “bye-bye” to that daily Starbucks, pack of cigarettes or fast food are just some ways to save extra money (saving $5 a day means that $150 stays in your pocket each month … nice!) Plan to increase this amount by $10 – $20 a month as you get raises or promotions to further speed up your savings.  Also start looking into RRSPs to gain tax benefits and some first-time homebuyer allowances.

“The power of time and compounding is your friend when you save money and your foe when you owe money. It isn’t the amount you save, it is the discipline you establish that sets you up for life financially.” – Patricia Lovett-Reid

“Small changes can yield huge results and small amounts of money can yield huge returns,” explains Patricia Lovett-Reid, senior vice president at TD Waterhouse Canada. “Here is an example: $50 per month at 18 equals $191,191 at age 65, assuming a 6.8 per cent return. If you wait until 35, you need to put away $169.61 per month for the same $191,191. At 45, the cost per month goes to $385.35 and at 55 the cost goes to $1,129.33. The power of time and compounding is your friend when you save money and your foe when you owe money. It isn’t the amount you save it is the discipline you establish that sets you up for life financially.”

Your career is progressing and you’ve firmly established yourself in the workforce. With life on track, this is a great time to explore alternative investment opportunities. Northern Citadel Bancorp suggests a Mortgage Investment Trust (MIT), which puts your investments into real-estate backed loans on the market. Feel free to push your contributions upwards to about $400 a month.

You might also be thinking of putting money aside for your children’s college fund. If you want to help your kids down the road, you will have to consider cutting back spending in other areas: cottages, boats, deluxe sound systems and fancy cars might have to be avoided if you plan to stay on track for that milly.

Around this time, you are starting to hit your earnings peak and retirement is becoming one of your major concerns. Disposable income should be more readily available but try to resist the urge to take on large new debts. Your retirement contributions should be at least $400 a month, but upwards of $600+ will bring you closer to your goal. Remember, the more you save now, the more you will have down the road, and the faster you can get out of the 40-hour-a-week grind.

“Retirement funding is driven by lifestyle and to the extent you can save. We could spend 30 years in retirement,” says Lovett-Reid. “We pay our taxes so I just think a payment into our retirement is a similar obligation. Base your contribution on pre-tax dollars. Start at five per cent and go up from there. We have to save something as we are all going to retire – one day.”

By now you should have a clear vision of your retirement. Understanding the lifestyle you wish to lead is crucial. It will affect how much money can be affordably spent once retired, so pay attention to time-sensitive needs. Because the end is so close, adjust some of your investments into lower risk accounts. However, remember that a lot of this money isn’t going to be touched for another 15 – 20 years, so there is still time to deal with market fluctuations; but don’t take your eye off the prize.Once you do retire, your income stops. This may be an obvious statement, but it is essential to become prudent with assets. Keep a close watch over your portfolio and make those savings last. It might be nice to save some of that hard-earned money for your offspring as well.

In the end, this plan isn’t for everyone. With compounding interest, $500 a month at seven per cent interest (no guarantee on the interest, though) for 40 years will bank you well over $1 million, but this isn’t always realistic. Bills can often mount up, having an active social life will also increase spending, and the cost of children will make saving even more difficult.

If you really want to reach that millionaire goal, stay conscious of your lifestyle choices early in life. Small things like buying new shoes, eating out regularly, or getting a 50-inch TV instead of a 30-inch version are all extra ways to spend money. You will be surprised at how much money you can save by cutting out unnecessary expenses and being conscious of your spending habits. As well, banks today will set up automatic monthly transfers to help put money in your savings without you having to worry about it. Just set it, forget it and watch the nest egg grow.


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