How to join the millionaire’s club by 65

Being a millionaire ain’t what it used to be. A new report by Cap Gemini and the Royal Bank of Canada says the number of people in North Americawith $1 million in investable assets climbed 11.5 per cent to 3.73 million last year.

But a million dollars is still a lot of money. In this age of multibillionaires it’s easy to lose sight of the fact that an individual can retire – very comfortably – on one million dollars.

On the bright side, becoming a millionaire at 65-years-old is easier than it used to be – especially if you start early in life and harness the power of compounding.

To illustrate the point, assume an investor started with $10,000 and made regular contributions. Let’s also assume a well diversified portfolio of investments – including a good mix of stocks and bonds – could generate an annual inflation-adjusted return of 7 per cent over the long term.

Here’s what you would need to do to reach your goal.

25-years-old: free and poor

If you took that $10,000 when you turned 25 you would need to invest $320 a month to become a millionaire at 65.

Easier said than done, right? That’s $3,840 a year. Most 25-year-olds don’t make a fortune but there are ways to stretch your investment dollars to get there.

For starters, employers often offer defined contribution pension plans where they kick in a portion. In some cases they may also contribute to a company share purchase program.

You can also turbo-boost your savings by re-investing your tax refund with a registered retirement savings plan (RRSP) contribution because the refund is compounded. In other words you get a refund on the refund, and so on.

A simple RRSP refund calculator can help determine how much you would need to borrow to match the refund. As an example, in order to make a $3,840 RRSP contribution an Ontario resident earning $40,000 a year only needs to save $3,200 and borrow the remaining $640. All things being equal, the refund should cover the loan.

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The trick is to ensure the refund is used to pay off the loan before the interest adds up.

35-years-old: kids, house payments

Waiting 10 years to start investing can put a serious crimp on your plans to be a millionaire at 65. Instead of $320 a month, a 35-year-old would need to sock away $775 a month to turn that $10,000 into seven figures.

35-year-olds are generally in a higher income bracket but that extra $455 a month can be hard to come by in your mid thirties if you have mortgage payments and kids.

45-years-old: established

By 45 most people are nearing their peak earning years. But with $10,000 and only 20 years to retirement you will need to save $1,850 a month or $22,200 a year to retire a millionaire.

Waiting that long to start saving for retirement could also dampen your return expectations. Investors with a longer time horizon have the ability to take more risks and potentially reap bigger rewards.

55-years-old: the struggle

Becoming a millionaire at 65 is almost impossible if you don’t start saving until you are 55-years-old. To reach your goal in 10 years you would need to add $5,700 a month or $68,400 a year to that $10,000 – and your portfolio would still need to return 7 per cent annually.

It’s only possible if you make a heck of a lot of money, but chances are you will need to lower your retirement expectations and work longer.