[scorpion_ca]

I have been reading lot of blogs (Canadian Couch Potato, MoneyGeek, MoneySense, CFM, Michael James on Money, Million Dollar Journey, My Own Advisor and etc.) lately. After reading these blogs, I have decided to set a goal that is save one million dollar by the age of 40. I have only 9 years to reach my goal.

Am I on track to reach my goal? – My gross income is around $120-125k (depends on bonus) a year and I try to save as much as possible. I did not buy a house as there is not enough job security in Canada. My monthly moving average expenses is around $1,700 though I am trying to reduce it to $1,500. My present net worth is $190K. Here is the breakdown of my asset allocation. I have started to invest in index funds and ETFs since last year.

Bond, GIC & Cash - 51% (Mostly in savings a/c 1.9%-2.05% interest and $17k ZAG in TFSA)
Equity - 40% (TD900, TDB902 & TDB911 in RSP)
REIT - 9% (ZRE in TFSA)
Total - 100%

Your valuable suggestion would be highly appreciated.

Thanks!

 

[Userkare]

To meet this goal, by simple math, you're going to need to generate on average 90k of savings per year.... 1,000,000 - 190,000 = 810,000 / 9 yrs = 90,000.

You'll have to calculate how much of your net salary over the next 9 years that you can invest, and what the return will be on that investment. Frankly, I can't think of any legal means that might allow you to reach that goal. Maybe you should be aiming at a 15 to 20 year goal instead.

Perhaps I'm too conservative with my investments, and someone else here may suggest some more aggressive investments with that kind of return.

 

[GreatLaker]

Just running some hypothetical numbers thorough Excel's Payment function (PMT)
i=5%
n=9
PV=-190,000
FV=1,000,000

Result PMT = -63,958

So at 5% rate of return, you would need to save $64,000 per year to have $1M in 9 years. Have you considered your risk tolerance in selecting an asset allocation that is 50% cash and fixed income? Depending on how much of that is cash even the 5% rate of return I used may be high.

If you go to the General Personal Finance forum on this site there is a thread called Online Calculators where you will find investment calculators that can help you determine future value for various savings rates and rates of return.

 

[scorpion_ca]

$90k savings is not possible unless I get huge raise that I don't foresee. I will be able to save around $55-65K per year; however, it will depend on my job.

I am conservative with my investments like you. I should have started to invest earlier but my knowledge was up to savings account and GIC. I have started to read financial books, news and blogs and trying to improve my knowledge.

 

[scorpion_ca]

I am investing more in equities nowadays. My plan asset allocation is 70%/30%. I did not want to invest everything in equities at once.

Just running some hypothetical numbers thorough Excel's Payment function (PMT)
i=5%
n=9
PV=-190,000
FV=1,000,000

Result PMT = -63,958

So at 5% rate of return, you would need to save $64,000 per year to have $1M in 9 years. Have you considered your risk tolerance in selecting an asset allocation that is 50% cash and fixed income? Depending on how much of that is cash even the 5% rate of return I used may be high.

If you go to the General Personal Finance forum on this site there is a thread called Online Calculators where you will find investment calculators that can help you determine future value for various savings rates and rates of return.

 

[Userkare]

The average $90K per year that I mentioned includes the compounded interest on investments as well as new contributions. One thing that you have to figure-in is the taxes on the interest paid on those investments. The combination of RRSP and TFSA yearly contribution limits is less than half of the 64K/year as quoted by GreatLaker, so you can't shelter it all. It's not so simple a formula as compounded interest when you take into account that not all the interest earned is yours to keep. I don't know how much RRSP/TFSA unused contribution room you have, and if you even want to consider an RRSP to reduce the tax burden. I guess it depends on how fast you want to burn though the $1M, because you'll pay taxes on the money when you withdraw it from the RRSP.

Maybe if you're good at using Excel, you can modify a compounded interest spreadsheet to subtract the estimated taxes to be paid on each year's interest; then you'll have an idea of the amount you need to contribute each year, and the rate of return needed to achieve the 1M in 9 yrs.

 

[scorpion_ca]

I have maxed out my RSP & TFSA and I will be able to max out next year too. I also use DRIP. My contribution to the registered accounts is around $26k per year. My plan is to save $1M and use that fund in my retirement. I will try to create an excel file and find out the yearly savings/investing amount.

The average $90K per year that I mentioned includes the compounded interest on investments as well as new contributions. One thing that you have to figure-in is the taxes on the interest paid on those investments. The combination of RRSP and TFSA yearly contribution limits is less than half of the 64K/year as quoted by GreatLaker, so you can't shelter it all. It's not so simple a formula as compounded interest when you take into account that not all the interest earned is yours to keep. I don't know how much RRSP/TFSA unused contribution room you have, and if you even want to consider an RRSP to reduce the tax burden. I guess it depends on how fast you want to burn though the $1M, because you'll pay taxes on the money when you withdraw it from the RRSP.

Maybe if you're good at using Excel, you can modify a compounded interest spreadsheet to subtract the estimated taxes to be paid on each year's interest; then you'll have an idea of the amount you need to contribute each year, and the rate of return needed to achieve the 1M in 9 yrs.

 

[steve41]

OK..... a quick RRIFmetic run says that.... at a $20,000 yearly expense level your rotten kids will inherit $2M at your age 95. If you adjust your lifestyle to $27,000, you will (just) die broke at 95.

No matter what, you will have to stick to the domestic beer.each:

 

[scorpion_ca]

still single and does not have any plan for kid..... drink occasionally (less than $100 a year)

OK..... a quick RRIFmetic run says that.... at a $20,000 yearly expense level your rotten kids will inherit $2M at your age 95. If you adjust your lifestyle to $27,000, you will (just) die broke at 95.

No matter what, you will have to stick to the domestic beer.each:

 

[steve41]

OK..... imported beer then. Then again.... single-no kids.... you might be able to embark on a serious alcohol addiction.

 

[My Own Advisor]

@scorpion - thanks for reading

Aggressive stuff, but it sounds like you are very determined. Your goal is not out of reach but definitely is a stretch goal.

As you already know, you will need to save at least $50k + per year, every year on average and have some kind markets (i.e., a continued bull run for the next 10 years) to help you realize this goal.

Market returns are out of your control. Your savings rate, and what your financial products cost you (i.e., money management fees) and managing taxes (or deferring them altogether) are well within your control. Focus on what you can control and don't worry about what you can't control.

To help you reach your goal, you might need to take on more equity risk, i.e., little bonds if any. Only you can decide if you can stick to your plan if you have no bonds and equities decide to drop 20-30% in value. Then of course you buy more equities when this happens. Easy to say you can do this on paper, harder to do in practice. Been there and still working on that. People that say they can do this all the time, they are usually kidding themselves. It takes practice but once you do it a few times, it gets easier. i.e., buying in 2008-2009 when others were selling. I didn't used to do this, it was scary, but I've learned:
http://www.myownadvisor.ca/now-enbridge/

Your TD efunds will serve you will well.

You seem to have the right attitude and that's not easy to put a number on but very, very important.
Good luck with your savings rate and goals.

 

[scorpion_ca]

I will be able to save more than $50k a year as long as I have a well paid job. I work for a stable, reputed company but the industry is full of uncertainty. My net worth was around $125k at the end of Dec 31, 2013 and I am forecasting to reach around $203k by Dec, 2014....depends on market. I think my savings rate is so far so good but always try to reduce the expenses.

I started to invest a year ago. So, I am learning day by day and investing more on equities. I will buy TD e-series another year. After that, I will switch to ETF to reduce cost.

 

[steve41]

OK..... I made some assumptions re your investment (RSP/nonreg) mix and future CPP levels as well as a 3% ror and 2% inflation guess..... but here is a rough 'die-broke at 95' plan....


http://www.fimetrics.com/on-track.pdf

 

[banjopete]

Scorpion, I think you're going to have to put on your brave pants and "risk" more of that cash/bond/gic balance in time. I see you want to slowly get into the market which might mean you're already going down this path though. As an exercise of goal setting it's good to have targets and I think you might surprise yourself with how easy they are to strive for once you get going.

One thing to consider also is that there is a whole world of ETF's that will cost you significantly less in MER's than even the miserly (for Mutual Fund's) TD e-series funds. I seem to remember the e-series stuff being around 0.5% MER, and there are many similar ETF's that will be in the 0.05-0.2% range pretty easily. Small change I know but it can be the difference of 7% or 7.5% returns on the flip side.

https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost

Good luck.

 

[scorpion_ca]

Thanks everyone for your valuable suggestions....especially Steve to prepare the nice report. I will review it thoroughly soon.

 

[GoldStone]

What is the significance of having $1M at 40? Would you be disappointed if you have $800K at 40 and $1M at 42? Why?

The goal sounds arbitrarily aggressive to me. It may be counterproductive, because it may push you to take unnecessary risk.

You may want to review Larry Swedroe's guide to asset allocation:

http://www.cbsnews.com/news/asset-allocation-guide-how-much-risk-should-you-take/
http://www.cbsnews.com/news/asset-allocation-guide-what-is-your-risk-tolerance/
http://www.cbsnews.com/news/asset-allocation-guide-how-much-risk-do-you-need/
http://www.cbsnews.com/news/asset-allocation-guide-dealing-with-conflicting-goals/

According to Swedroe, asset allocation decisions should be based on 3 factors:

ability to take risk
willingness to take risk
need to take risk

Come up with a solid plan that matches your ability, willingness and need to take risk.

Whether your reach $1M at 40, 42 or 45 depends on the market returns. They are out of your control.

 

[scorpion_ca]

I will not be disappointed if I have $700/800k at 40. The reason I chose this goal is that it will help me to reduce cost, increase savings and I will be able to get around $30/40K interest/dividend as a second income. I think it will give me financial freedom.

I would like to complete MBA in Finance and change my career once I reach my goal. I don't want to quit my job and complete MBA at this moment.

What is the significance of having $1M at 40? Would you be disappointed if you have $800K at 40 and $1M at 42? Why?

The goal sounds arbitrarily aggressive to me. It may be counterproductive, because it may push you to take unnecessary risk.

You may want to review Larry Swedroe's guide to asset allocation:

http://www.cbsnews.com/news/asset-allocation-guide-how-much-risk-should-you-take/
http://www.cbsnews.com/news/asset-allocation-guide-what-is-your-risk-tolerance/
http://www.cbsnews.com/news/asset-allocation-guide-how-much-risk-do-you-need/
http://www.cbsnews.com/news/asset-allocation-guide-dealing-with-conflicting-goals/

According to Swedroe, asset allocation decisions should be based on 3 factors:

ability to take risk
willingness to take risk
need to take risk

Come up with a solid plan that matches your ability, willingness and need to take risk.

Whether your reach $1M at 40, 42 or 45 depends on the market returns. They are out of your control.

 

[steve41]

OK then...... that plan was for an ROR of 3%. It resulted in a $27K after-tax lifestyle. At 1%, he secures a $22K lifestyle.

1% seems like a pretty risk averse goal to me.

 

[scorpion_ca]

It's been a good year and my net worth is around $205k at the end of 2014....target to save a million by 2024.

 

[supperfly17]

It's been a good year and my net worth is around $205k at the end of 2014....target to save a million by 2024.

Not sure if you mentioned this, but why do you want to have a million dollars by the time you are 40?