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Who Wants to be a Millionaire?

You want to be a millionaire? You don't need to buy lottery tickets, shares in the latest dot.com stock or a mattress stuffed with every last penny you earned. You just need time. But, take notice that when it's time to retire, your million dollar net worth may not be enough.

For most people in the middle class, becoming a millionaire will not only be routine, it will be essential. Consider this: John and Mary are both age 40, have $100,000 each in their RRSP and live in a home worth $300,000, with a sizeable mortgage. Not an uncommon situation by any stretch of the imagination.

If their RRSP earn 8% per year, and the house value increase by 3% per year (the current rate of inflation), by the time they are 60 their combined net worth will be close to $1.5 million. And this will be achieved without spectacular investment returns and without saving a penny going forward. At that time, the mortgage will be paid off so they will own the house outright.

But this $1.5 million may not do much for their retirement. In today's dollars, RRSP withdrawals taken in installments until age 85 will provide each with only $17,000 per year. If you add full Government pensions, they will each get about $27,000 per year. If they sell the house and live off the cash, their annual income will climb to about $37,000 each. Is this enough? Will this sustain a lifestyle filled with travels and leisure activities? Or is this the prescription for a life of penny-pinching?

So when can you retire and how much is enough?

The answer depends on you. How much you need to live on? If you plan to live it up with plenty of expensive activities, then you will need much more than if you take up a frugal lifestyle. But retirement won't be cheap. Many don't want their lifestyle to suffer. And the idea that retirement costs less is not necessarily true anymore with items such as travel, hobbies, eating out and keeping the home.

There are also new retirement expenses that did not exist before. We may very well have to travel often across the continent to visit our children and grandchildren. We baby-boomers married later than their parents. Thus, we started our families at a later age. The consequence is that our retirement will coincide with the expense of our children's college years. And ten years later, they will be getting married. Our aging parents will live longer and we may have to help them with the cost of long term care as their life extend well into their 90s.

Most importantly, we must understand that our retirement will go on for a long time. If we retire at 60, we may very well be retired for a longer time than we spent working. It would be truly amazing if we earn enough in 40 years to sustain ourselves through 40 years of retirement.

So, $1 million, or even $2 million may not be enough. If you retire at a young age, you risk outliving your assets, and your company and government pension will be hurt when you retire before the age of entitlement to the full pension.

A fail-safe strategy is to live off your investment earnings. For example, if you withdraw 5% of your net worth each year, your returns should be above and you will last forever. You can top this up with your corporate or government pension. But it is a very expensive strategy.

If you feel no need to pass a large estate to your heirs, it is not necessary to preserve capital. Drawing the nest egg down is daring as you could run out of money one day. This requires a structured approach, careful long term projections and regular monitoring. And dipping into your capital may be your only option for a comfortable retirement, if an annual draw of 5% of your assets cannot sustain your lifestyle.

If you're not retired, you're never too rich to save. Even if at age 40 you have already stashed away $500,000 you will need to save if you plan to call it quits at 60.

Make use of RRSPs as much as you can; tax-deferred savings are a miraculous invention. The tax break boosts your returns. If your employer provides a defined contribution pension plan or group RRSP that matches part of your contributions, you should take advantage of this as much as you can.

Plan to save separately for your children's university education. If children are young open a Registered Education Savings Plan. There is no tax on investment earnings and the Government will match a portion of your contributions.

And if you just want to be a millionaire, do nothing! Our retirement dreams must be anchored in reality. We can only realize these dreams with careful planning, shrewd investing and an established and sustained savings plan.

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