A million dollars may not be what it used to be, but it still represents a powerful and motivating target for most RRSP savers.
So what does it take to become an RRSP millionaire? Diligent saving, of course. But also flexibility – and a healthy dose of luck.
For starters, it helps to assume that you make a good salary and never get laid off.
According to one online calculator, a 30-year-old would have to earn at least $74,000 a year and contribute 18 per cent of her salary each and every year to an equity-heavy portfolio to wind up with more than $1-million in her RRSP by the age of 60.
That assumes she achieves an average annual return, after inflation, of 5 per cent and gets regular salary increases that are slightly higher than inflation.
How realistic is that? It all depends on your individual circumstances, of course, but it's definitely an achievable goal. Once you factor in the tax refund, you are contributing only about 12 per cent of your annual income.
Using similar assumptions, people earning less than $74,000 can embark on a similar million-dollar journey if they begin at an earlier age – for example, at 25 with a salary of $53,750 or more. Those willing to save at a higher rate with the help of a Tax Free Savings Account can lower the threshold further, or reach their goal faster.
Not many people relish the thought of saving more than a tenth of their income every year, but regular payroll deductions can ease the pain.
David Chilton, author of The Wealthy Barber Returns, says most people who begin to save 10 to 15 per cent of their income via an automatic savings plan "are amazed at how little change they notice in their consumption." They are also more likely to avoid classic overspending mistakes, such as paying too much for a house or car.
If you, too, can sidestep the pitfalls, it seems like hitting the million-dollar mark in your RRSP journey is tough but doable. Beware the twists in the road, though.
One issue is that a portion of the capital in your RRSP belongs to the government – while you escape paying tax on the income you put in, you have to pay the taxman when you withdraw it years later.
If you wind up paying a 32 per cent tax rate on withdrawals when you retire, a million dollars in an RRSP translates into net wealth of only about $680,000. To achieve a million dollars in net wealth, you would have to bump up your savings rate even higher.
Also, using a constant rate of return for stocks can create a false impression of certainty. Historically, there has been a great deal of variation around the long-term average for stocks. For someone hoping to wind up a millionaire 30 years from now, the actual outcome of a given level of savings could end up between $500,000 and $2.5-million, depending on how the market performs during that time.
Moreover, it's impossible to predict the real world in all its complexity. For example, governments' fiscal problems might cause tax rates and inflation to be higher than expected, and CPP or OAS to be scaled back.
The best way to plan your assault on millionaire status is to play with the numerous online retirement calculators that are now available. You will quickly gain an appreciation for all the variables – savings levels, rates of returns and inflation, to name just three – that can affect your savings plans.
You will see that the earlier you start to save, the better. You will also see that flexibility is vital: If actual results are deviating from your projections, you must be prepared to bump up your savings to get back on track.
Finally, you will gain an appreciation for just how difficult it is to hit millionaire status. If you wind up a bit short, don't berate yourself – you're still ahead of most Canadians.