The Motley Fool

Retirement Planning: How Can You Reach $1,000,000 in Savings?

Image source: Getty Images

Saving for retirement can be a challenge, especially knowing that you probably need close to $1,000,000 to be able to live comfortably. Sure, your lifestyle will change and your expenses will change.

You’ll also have Canada Pension Plan (CPP) and Old Age Security (OAS) payments to help get you through retirement. However, scraping by and making do with what’s available is probably not a decision you’re going to be fond of when the time comes to retire.

That’s why it’s important to start saving well before then and at least make an effort toward building up your savings as close to the $1,000,000 mark as possible. And below, I’ll show you how you can do that while diversifying and not taking on too much risk.

The key to growing your portfolio is putting money aside regularly to ensure that you not only get the benefit of compounding from the funds already sitting in your portfolio, but also new funds adding to those returns as well.

In an ideal scenario, you would contribute a lump say and then $6,000 per year to your Tax-Free Savings Account (TFSA), which is the current year’s additional contribution room. If we assume that will remain constant, investors can potentially add a lot of cash to their TFSAs and benefit from the earnings those investments make over time.

Let’s look at a scenario in which you might invest $50,000 today and then $6,000 per year in an exchange-traded fund like the BMO Canadian Dividend ETF (TSX:ZDV), which provides investors with a dividend yield of 4.3% annually.

It also features many big-name stocks from various industries that can help add some diversification as well. If we assume that the ETF will rise at a rate of 5% per year plus generate dividend income, here’s what your portfolio may look like over time under the above scenario:

Year Total Contributions Beginning Portfolio Balance Growth Ending Portfolio Balance Dividends Total Dividends Portfolio + Dividends
1 $50,000 $50,000 $2,500 $52,500 $2,150 $2,150 $54,650
2 $56,000 $58,500 $2,925 $61,425 $2,408 $4,558 $65,983
3 $62,000 $67,425 $3,371 $70,796 $2,666 $7,224 $78,020
4 $68,000 $76,796 $3,840 $80,636 $2,924 $10,148 $90,784
5 $74,000 $86,636 $4,332 $90,968 $3,182 $13,330 $104,298
6 $80,000 $96,968 $4,848 $101,816 $3,440 $16,770 $118,586
7 $86,000 $107,816 $5,391 $113,207 $3,698 $20,468 $133,675
8 $92,000 $119,207 $5,960 $125,167 $3,956 $24,424 $149,591
9 $98,000 $131,167 $6,558 $137,726 $4,214 $28,638 $166,364
10 $104,000 $143,726 $7,186 $150,912 $4,472 $33,110 $184,022
11 $110,000 $156,912 $7,846 $164,758 $4,730 $37,840 $202,598
12 $116,000 $170,758 $8,538 $179,296 $4,988 $42,828 $222,124
13 $122,000 $185,296 $9,265 $194,560 $5,246 $48,074 $242,634
14 $128,000 $200,560 $10,028 $210,588 $5,504 $53,578 $264,166
15 $134,000 $216,588 $10,829 $227,418 $5,762 $59,340 $286,758
16 $140,000 $233,418 $11,671 $245,089 $6,020 $65,360 $310,449
17 $146,000 $251,089 $12,554 $263,643 $6,278 $71,638 $335,281
18 $152,000 $269,643 $13,482 $283,125 $6,536 $78,174 $361,299
19 $158,000 $289,125 $14,456 $303,582 $6,794 $84,968 $388,550
20 $164,000 $309,582 $15,479 $325,061 $7,052 $92,020 $417,081
21 $170,000 $331,061 $16,553 $347,614 $7,310 $99,330 $446,944
22 $176,000 $353,614 $17,681 $371,294 $7,568 $106,898 $478,192
23 $182,000 $377,294 $18,865 $396,159 $7,826 $114,724 $510,883
24 $188,000 $402,159 $20,108 $422,267 $8,084 $122,808 $545,075
25 $194,000 $428,267 $21,413 $449,680 $8,342 $131,150 $580,830
26 $200,000 $455,680 $22,784 $478,464 $8,600 $139,750 $618,214
27 $206,000 $484,464 $24,223 $508,688 $8,858 $148,608 $657,296
28 $212,000 $514,688 $25,734 $540,422 $9,116 $157,724 $698,146
29 $218,000 $546,422 $27,321 $573,743 $9,374 $167,098 $740,841
30 $224,000 $579,743 $28,987 $608,730 $9,632 $176,730 $785,460
31 $230,000 $614,730 $30,737 $645,467 $9,890 $186,620 $832,087
32 $236,000 $651,467 $32,573 $684,040 $10,148 $196,768 $880,808
33 $242,000 $690,040 $34,502 $724,542 $10,406 $207,174 $931,716
34 $248,000 $730,542 $36,527 $767,069 $10,664 $217,838 $984,907
35 $254,000 $773,069 $38,653 $811,723 $10,922 $228,760 $1,040,483

Even adding $6,000 per year, it would take about 35 years of consistent returns and dividend income to get your portfolio to $1,000,000. However, a couple things to note here is that because this would be in a TFSA and the funds withdrawn wouldn’t be taxable, you could get away with less than $1,000,000.

Second, there’s never any guarantee when it comes to dividends or returns, and depending on how well the ETF does, your portfolio’s value could look much different over 35 years. Finally, you can always accelerate your portfolio’s growth by saving more and investing more money into your portfolio.

Bottom line

Investing in an ETF is a good way to diversify and add income. While getting to $1,000,000 is by no means easy, the above example is an approach that may be suitable for risk-averse investors who aren’t willing to invest in a growth stock and put their savings in danger.

Under this scenario, investors would be relying on steady growth and dividend income to reach $1,000,000, albeit there are certainly more aggressive approaches that investors can employ as well.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.