Dreaming of a million bucks? It's attainable

There's something magical about having a million dollars.

Whether we are singing along with the Barenaked Ladies or watching the Oscar-winning movie Slumdog Millionaire and hearing Anil Kapoor ask repeatedly, "Who wants to be... a millionaire?", that figure has always symbolized financial independence and security.

Perhaps this was really established in the late 1950s, by the TV show The Millionaire, in which secretive multimillionaire John Beresford Tipton gave $1 million away each week to a deserving recipient.

To rudely put that in perspective, though, he would need to be giving away about $9 million today to have the same effect on a person's life, thanks to the effects of inflation.

So, in 2012, is $1 million enough to fund the retirement you want? And how do you accumulate $1 million during your working lifetime?

Many of the readers of this column are retired and many are already quiet millionaires, when all assets are included. All of my clients are millionaires.

In both cases, virtually all of these people achieved that milestone by spending less than they made, saving and investing consistently over several decades, owning a home that appreciated in value and focusing on the long-term goal of accumulating enough capital to fund a secure retirement.

That makes it sound easy and, in a sense, it is. Or, rather, it's easy if you have the commitment and time to carry out that plan, and can avoid being seduced by the siren call of marketers, fashions and products along the way.

For most of us, it means driving older cars, shopping at Winners and saving for vacations, instead of using credit cards and borrowed money.

Here's the "easy" math:

If a 25-year-old earning $40,000 a year invests $250 a month into an RRSP (10 per cent of net income), reinvests the tax saving as well, increases the contribution as income grows and earns an average of six per cent on the invested money, that person will have more than $1 million at age 65.

It does not require an inheritance, lottery win, business sale or other windfall. It just takes consistency and time.

So much for the easy part; now for some harsh realities.

Depending on inflation, the purchasing power of that $1 million will be cut in half (or worse) over those 40 years. However, it will still be a lot better to have $1 million than not.

The inflation factor simply means you may need to accumulate more, or supplement it with a pension or other future source of income.

What does a million dollars provide today in terms of annual income?

Responsible financial planners use a sustainable withdrawal rate of four per cent these days, for a 65-year old with a normal life expectancy.

This provides something in the order of 90 per cent certainty of not outliving that capital, even when increasing the withdrawals to keep pace with inflation.

Using a five per cent withdrawal rate may work well if the investments and the timing of withdrawals are carefully managed, but the more money that is withdrawn, the greater the chance of running out of money.

For many people, $40,000 of investment income, when combined with government benefits, is enough to fund a pleasant retirement lifestyle. For others, it's not nearly enough.

One key to your happiness is to tailor a financial plan to your personal needs, wants and resources, determining realistically what you can achieve and living within that envelope. That's true for people with $300,000 or $3 million.

Perhaps the bad news is that, as the late Andy Griffith might have said, "Gosh, a million dollars just ain't what it used to be!"

But the good news is there are an awful lot of happy people around who don't have $1 million and never will.

Don't let the marketers or financial writers persuade you to be less than content with your life.

The actual numbers don't matter; it's how you enjoy them.

So get out there and enjoy the sunshine and the summer festivals, or stay home and watch the British Open and the Summer Olympics, or enjoy some great summer reading. None of that has to cost much.

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition July 6, 2012 B5