When it comes to creating a million-dollar retirement portfolio, many may believe it’s just a dream. Yet still, many Canadians believe it’s a necessity these days.
The average Canadian believes that they need about $1.7 million to retire comfortably, according to a study by BMO. And that’s been increasing at a steady clip since inflation and interest rates are on the rise.
Whether you need that much or not is up for debate. However, there is a way to achieve it. So let’s look at what some millionaires do to gain that amount for retirement.
1. Match it
One of the easiest ways to increase your Registered Retirement Savings Plan (RRSP) is to take part in a company match. This can be particularly helpful if you just cannot seem to get to that full contribution limit outlined in your Notice of Assessment (NOA). And if that’s the case, you’re leaving free money just lying there!
The way it works is that employees can opt into a company’s group RRSP matching program. As you contribute to the group RRSP through a deduction from your payroll, the employer then matches it. That will continue up to a specified amount, or a percentage of your total salary. So if you make $100,000 per year, that’s an extra $5,000 from the 5% from your employer!
There are some downsides, however. First of all, this is still taken out of your income, and it’s still taxed by the government as income from your employer. Furthermore, it’s going to be an amount far less than the maximum allowable contribution. What’s more, if you’re part of a group RRSP, you may not be able to make investment choices yourself. So if you’re maxing out by investing yourself, then it might be better to keep going as per usual.
In fact, saving just 10% of your salary to contribute to your RRSP could still make you a millionaire! Save $6,000 from a $60,000 salary and over 40 years that’s $240,000 that could be invested for millionaire-status.
Max it out
The thing is, if you really want to reach millionaire status, you’re going to want to keep as much cash as you can on hand. And that’s where maxing out on your RRSP comes into play.
For every dollar that you contribute to your RRSP, this comes right off your taxable net income. The more you contribute, the closer you could be to a lower tax rate! A lower tax rate means you’re paying less to the government, and you’re able to keep that cash and receive a refund at tax time.
That being said, while it’s great to try and max out, it’s not a necessity. Instead, look at the tax rates for your province and by the federal government, and see what you would need to achieve a lower tax bracket. This could save you thousands each year, and be put towards your RRSP investments.
Don’t take it out!
There is a reason we have an RRSP and a Tax-Free Savings Account (TFSA). The TFSA is great if you want to invest for short-term goals. However, the RRSP is for retirement. Taking any cash out early can put a huge wrench in your work.
And that comes in multiple ways. First off, if you’re taking out cash from your RRSP, the government is going to mark it as taxable income. So there’s that. Then, on the other hand, you’ve done all this work to figure out how much you need to invest and how long to reach your millionaire retirement status. Taking out cash will put you back by potentially a severe amount!
So millionaires also do not take out cash on the way towards a million dollars. That’s true even if you want to take out cash and keep it, or if you fear that the market will fall. Instead, consider that over time the stock market climbs. Therefore, keep your cash right where it is.
If you’re hoping to achieve $1 million, then follow these rules and consider safe investments through a diverse mix of stocks, bonds, guaranteed income certificates (GIC), and funds. A great option is to find a high-yielding exchange-traded fund (ETF) for free cash you can use to invest!
For example, consider the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY), which has a dividend yield at 4.55% as of writing. The stock invests in equities that have a long history of dividend growth, and shares have risen steadily over the last few years.
If you were to take that $6,000, you could create automated contributions of your own towards this ETF. You then can use the extra cash from the dividend to reinvest into it as well. This will help you gain even more income in the long term, and help you towards that million-dollar status.