Let’s start with some working parameters:
Let’s say I earn $51,000 per year, (i.e. the average salary in Canada per Workopolis), and let’s also say I want to achieve the proverbial $1,000,000 nest egg by age 65.
As of April 2018, the Financial Planning Standards Council suggests Canadian Equity will generate an average long-term return of 6.4% per year, and Fixed Income will earn 3.9% per year.
In terms of the cost of investing, Mutual Funds can cost 2% per year, and ETFs can cost 0.20%, (yes, the decimals are in the correct place, Series “A” Mutual Funds cost 10 times more than ETFs).
Ok, let’s say I am 22 years old, (oh I wish) and have graduated college / university or achieved a trade, and am very fortunate to be earning the Canadian average salary of $51,000 per year.
I am a real keener, so I visit my local Bank branch where the very nice “advisor” person has me answer some risk profile questions. I don’t know what I don’t know about investing but do my best. Based on my “uninformed answers”, the very nice advisor person suggests a Balanced Mutual Fund (60% Equity and 40% Fixed Income) so that I don’t experience too much volatility. I think this all sounds very smart and I feel quite responsible. I am an adult now!
The Balanced Mutual Fund return is expected to be 5.4%, (i.e. 60% Equity * 6.4% Equity return) + (40% Fixed Income * 3.9% Fixed Income return). HOWEVER, that 5.4% return is BEFORE the 2% Mutual Fund fee, which means I only get to keep 3.4% per year.
Under this scenario, if I start to invest at age 22, in order to achieve my goal of $1M by age 65, the nice advisor person tells me I need to save and invest $10,600 per year, or almost 21% of my salary.
21% of my gross salary!!!
THAT IS GROSS!! “Impossible”, I say.
Worse, for each year I wait, I need to save an additional $550 per year. If I wait until I am 30 to start this program, the not so nice advisor person tells me I will have to save $15,300 per year or about 45% MORE than if I had started at age 22.
I am discouraged and decide to focus the money I have on life “experiences”, and to hell with the future………
Re-do, let’s say I am 22 years old, and very fortunate to be earning the Canadian average income of $51,000 per year.
Only this time instead of talking to the very nice advisor person at my local Bank branch, I used my Googlizer to see if there was a better way to invest. Low and behold, there is!
Online, I can set up a direct investing account at one of the alternative trading platforms like Questrade, Qtrade, or I could even set up a direct investing account at one of the big Bank online brokerages. Now I can purchase equity ETFs directly, effectively cutting the very nice advisor person out of the action. I do feel a little bit bad about that, but I need to look after myself and my future family. Ok better now.
Based on my accepting this increased volatility, I am well positioned to invest in an all-equity ETF portfolio which is expected to earn 6.4% per year. But I must now subtract the ETF fee of 0.2% (not 2.0%), and as a result, my net return from an all equity ETF portfolio is expected to 6.2%.
Under this scenario, starting at age 22, I need to save and invest $5,050 per year, (or LESS THAN ONE HALF as much as if I invested in Balanced Mutual Funds), to achieve my goal of $1,000,000 at age 65. Now $5,050 is still a heck of a lot of money, but it equates to a manageable $13.80 per day or 9.9% of my annual salary.
Workopolis says the average salary in Canada is $51,000 per year, but if you happen to be in Finance and Insurance, Scientific and Technical Services, or are doing well as a Project Manager, Business Analyst, Registered Nurse or in Sales, typical salaries can be $70,000 or more per year.
At $70,000 per year, in order to achieve the same $1M at age 65, the $5,050 required to be saved and invested equates to only 7.2% of salary.
Having difficulty putting money aside to fund an investment program? Check out a list of ideas of how to save $13.80 per day in order to fund a $1,000,000 investment program.
Alternatively, grab a copy of Cash Flow Cook Book by Gordon Stein. Gordon identifies 60 ways day to day expense categories can be trimmed without having to live in a cave.