Building a $1,000,000 RRSP Starting in your 30’s, 40’s, and 50’s.

I recently wrote about how you can build a comfortable retirement lifestyle even if you start a little late. 

The article included a couple of examples of an investor who starts in his/her 40’s and 50’s and still result in a comfortable middle-class retirement.  But what if you want a little more during retirement?  What if you want to travel more than the average and/or want to maintain a higher lifestyle?  

A person in who is age 40 in a 40% tax bracket, contributing $6,000/year (increasing annually for inflation) and reinvesting their RRSP tax refunds, would have a $500k RRSP balance when they turn 65 (assuming 4% return after inflation). 

While the $500k can produce $20k/year for 30 years with high certainty (96% probability), you can add another $15k (or $30k/couple) in seniors government benefits assuming s/he has lived and worked in Canada all their lives.  

Putting it all together, the couple would have a retirement income of $50k/year.  With no debt, $50k/year is about how much our family of 4 spends to live comfortably (not including travel).

So instead of a $500k portfolio at age 65, what if you want to be an RRSP millionaire instead?  This would give you $40k/year from your portfolio until death, then government benefits added on top.  Using the couple example above, it would result in a heftier retirement income of $70k/year. 

While these are before tax numbers, taxes can be further reduced with income splitting strategies like contributing to a spousal RRSP (I’m in the process of opening a spousal RRSP account with Questrade).

Higher income sounds ideal in retirement, but how much would you need to save in your 30’s, 40’s and 50’s to reach that millionaire portfolio milestone?

Starting at 30, Millionaire at 65

Assumptions:

• 30 years old
• 35 years left until retirement
• 4 % return (after inflation)
• 35% marginal tax rate
• Increase savings/year with inflation (assume 2%)
• All RRSP contributions reinvested

Results:

I built a simple spreadsheet that models a steady return and reinvesting the tax refund generated by the RRSP contribution.  Based on the assumptions above, for a 30-year-old who wants to have a million dollar RRSP by age 65 would need to save $7,000 per year ($585/month), adjusting for inflation annually.  If the 30-year-old makes a higher income and in the 40% tax bracket, s/he will reach millionaire status a year earlier.

Starting at 40, Millionaire at 65

Assumptions:

• 40 years old
• 25 years left until retirement
• 4 % return (after inflation)
• 40% marginal tax rate
• Increase savings/year with inflation (assume 2%)
• All RRSP contributions reinvested

Results:

Based on the assumptions above, for a 40-year-old who wants to have a million dollar RRSP by age 65 would need to save $12,000 per year ($1,000/month), increasing with inflation annually.  

Starting at 50, Millionaire at 65

Assumptions:

• 50 years old
• 15 years left until retirement
• 4 % return (after inflation)
• 40% marginal tax rate
• Increase savings/year with inflation (assume 2%)
• All RRSP contributions reinvested

Results:

There is less time until retirement for a 50 year old which results in less compounding over time.  Never the less, strong earnings combined with high savings can still result in a wealthy retirement.  Based on the assumptions above, for a 50-year-old who wants to have a million dollar RRSP by age 65 would need to save $28,000 per year ($2,333/month), increasing with inflation annually.  

You may notice that $28k is above the RRSP contribution limits but can be mitigated in a couple of ways.  Chances are if you are starting your RRSP at 50, you have a ton of unused contribution space.  If that gets used up, and you have a spouse, consider the $28,000/year a team effort split between two RRSP accounts.  

Summary

Becoming an RRSP millionaire is not out of reach for higher income people with aspirations of a comfortable retirement. 

• Starting at 30, with conservative assumptions, saving $585/month (increasing with inflation annually) and reinvesting the RRSP tax refund will result in a $1M portfolio in 35 years.
• Starting at 40, with conservative assumptions, saving $1,000/month (increasing with inflation annually) and reinvesting the RRSP tax refund will result in a $1M portfolio in 25 years.
• Starting at 50, with conservative assumptions, saving $2,333/month (increasing with inflation annually) and reinvesting the RRSP tax refund will result in a $1M portfolio in 15 years.

While this article talks about the levels of savings required based on conservative assumptions, it doesn’t get into “how“.  Sometimes, investors can be their worst enemy, buying high and selling low.  Best bet would be to build a mostly hands-off globally indexed portfolio that will give you the assumed returns in this article over the long-term.  Here are some easy ways to index your portfolio.  Also, make sure to keep your investment fees low by choosing a low-cost discount broker. 

Happy Investing!