How to build a million dollar portfolio
They say a million dollars isn’t what it used to be. Fine. In my book though it’s still a huge pile of money. Beyond inflationary pressures, workplace pensions disappearing over time. This means you’ll need to rely on you to fund a secure retirement.
Whether you’re just starting out your career as a 20-something or you’re coming in late to the retirement-saving-party, there are different ways to build a magical million dollar portfolio (or close to it). Let’s see two examples today.
Retirement Accounts 101
Regardless if you have a workplace pension or not, I believe all Canadians should know about two key accounts they can use to save for their retirement:
- Tax Free Savings Account (TFSA)
- Registered Retirement Savings Account (RRSP)
While both accounts have the word “savings” in them don’t let that confuse you with how they work and how both accounts can be used to build your million dollar portfolio:
|A tax-deferral plan.||A tax-free plan.|
|Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution.||Contributions are made with “after-tax” dollars.
|Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate.||Contributions are not tax deductible; there is no refund to be had.|
|If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit.|
|If you make a withdrawal, contribution room is lost.||If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.|
|Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal. They are treated as income and taxed at your current tax rate.||Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.|
|Since withdrawals are treated as income, withdrawals could reduce retirement government benefits.||Withdrawals are not considered taxable income. So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.|
|You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year.||You can contribute to a TFSA after age of 71.|
|The Summary: part of your RRSP is borrowed money.||The Summary: all of your TFSA is your money.|
With those sets of reminders about the powerful tax-deferred (RRSP) and tax-free (TFSA) nature of each account, let’s look at how to build that healthy retirement nest egg.
- Save early and often and never stop
I believe an early and consistent stream of contributions to the RRSP will work out very well for the majority of Canadians, hopefully myself included! While contributing to the RRSP makes the most sense when your marginal tax rate at the time of contribution is greater than your marginal tax rate at the time of withdrawal, this doesn’t mean the RRSP cannot be used by lower to middle-income Canadians or individuals just starting out their careers – although the TFSA may be more beneficial from a future tax perspective.
Let’s use 20-something Saver No. 1 in my post today Early Earl as an example:
- He has $1,000 in his RRSP at age 25 in cash (for now) as current investments.
- He makes annual contributions worth $500 per month going-forward; and will buy mostly equities thanks to reading his favourite wealth-building blog (My Own Advisor).
- He anticipates his return is about 6% (because he has heard about lower stock market projections long-term and he wants to be realistic).
- He wants to start drawing down his RRSP at age 60.
Here are Earl’s results:
Early Earl will have, roughly, just over $700,000 inside his RRSP at age 60. Pretty good! This is not a million dollar portfolio you might say. Very true – but my calculations above ignore other factors that could help Early Earl (and his future family) reach a million dollar target.
- Earl can contribute more to his RRSP as his income grows as he gets older, over a 35-year career. I will assume Earl will change jobs and get promotions over decades of full-time work.
- These calculations ignore the use of his TFSA. He can and should contribute to that account when extra money is available.
- His long-term returns could be more than 6%; this may or may not happen mind you – since 1980 to present, the U.S. S&P 500 as one stock market index has produced annualized returns of close to 9%.
- Early Earl eventually gets married in his 30s; his partner also adopts the same savings and investing gene; so together they both save and invest to build family wealth thereby making up the $300,000 shortfall to $1 million.
Now, when I was 25, I wasn’t yet saving $500 per month (I recall I was saving at least $100 per month though) so let’s look at another, potentially more realistic example for younger works and savers.
- Save modestly and aggressively later on
We’ll call Saver No. 2 in my post today Late Lorraine.
Lorraine has already been reading My Own Advisor for many years now so she already knows about the value of low-cost Exchange Traded Funds (ETFs) for investing; she knows to keep her financial costs low; she understands the power of long-term growth and invests in mostly equities; she knows she needs to make regular contributions to her RRSP and/or TFSA; she has learned to avoid all the talking heads on TV about Bitcoin; the list goes on…
Lorraine was busy having fun in her 20s, finishing her degree; did some travelling (can’t blame her) and waited until her early 30s to get married to her long-time boyfriend from university. She bought a house in recent years and has started to raise three beautiful but very energetic young boys!
With mortgage payments now well in hand, Lorraine (now 35) along with her husband want to get serious about saving and investing for retirement. They want to retire by age 60.
Although Lorraine has only $50,000 in her RRSP, with a revised spring budget that involved cutting out lots of financial waste around the house, she and her husband estimate they can start socking away a cool $1,000 per month for their retirement. Great work!
Lorraine decides to start contributing to her TFSA (she has $0 in that account) but knows with a decent paying job she should also maintain contributions to her RRSP ($500 per month). (She has no workplace pension.) Her husband might also save some money in future years but he’s a largely stay-at-home-Dad who does some consulting work from time to time so we’ll just focus on Lorraine.
Here is what her savings could look like by age 60 assuming 6% rate of return for the RRSP:
Here is what Lorraine’s TFSA could look like assuming she starts with a $5,500 contribution this year, earns 6% for her investments long-term, and the TFSA contribution limit grows with the rate of inflation (2%) for her contributions:
All RRSP and TFSA values approximate for illustrative purposes. For images above, you can find great, free calculators and tools here. References are on that page.
Sure, another example that’s short of a million dollars but let’s not forget I mentioned “or close to it”! Besides:
- I’ve assumed Lorraine’s husband barely saves anything over his work career – if he does – the shortfall could be made up.
- Lorraine never maxed out her TFSA account. She still has tens of thousands of dollars in TFSA contribution room left to catch up on since the account was introduced almost a decade ago and she only started to contribute now. Should she decide to maximize the contributions to the TFSA (thanks to a few bonuses at work over the next 25-years) the shortfall could be made up.
Besides that, (Early) Earl and (Late) Lorraine have some government benefits to look to forward to in their golden years due to many full-time years in the workforce. Those benefits will come in the form of Canada Pension Plan (CPP) and Old Age Security (OAS) payments.
With almost a million bucks in the bank they’ll have options for when to take their CPP and OAS.
So, after adding in CPP and OAS fixed-income benefits that should average about $1,000 per month in combined income at age 65 or so, even with some assumed million dollar shortfalls, I guess they’ll need to consider Airbnb for accommodations just off the Florida coast for a few weeks each winter instead of having an ocean view room. Tough life!
How to build a million dollar portfolio summary
Whether you are Early Earl or Late Lorraine or any saver and investor in between, I hope this post has emphasized you can have a very healthy retirement nest egg if you strive to do the following things more often than not:
- Save and invest regularly (early on is better, so you won’t need to save as much for retirement later on…).
- Keep your investing costs/transaction costs/money management costs low so you can earn a reasonable rate of return (close to 6%) after fees/costs are accounted for.
- Stay invested over many decades.
My bet is, if you strive to maximize contributions to your RRSP or TFSA or both (ideally), by following 1-2-3 above you will likely have a million dollar portfolio after a few decades.
Building a million dollar portfolio can be a very tall order for many Canadians.
That figure will probably discourage some investors from trying at all.
My suggestion is not to let big numbers scare you from putting a financial plan in place.
Focus on those three principles above. In doing so I suspect, over many years, you’ll be rather pleased with your efforts.
For savers and investors striving to build your retirement portfolio – how are you doing that? For investors who have already realized their financial goals – how did you get there? Comment away. I read every one. Thanks for being fans.
Late to the game….
re: Building a million dollar portion [sic] can be a very tall order for many Canadians. That figure will probably discourage some investors from trying at all.
Not sure why.
Only ~1% of Canadians own a million dollar portfolio yet ~15% of Canadians are retired (with more on the way!).
Truth is, 99% of Canadians will never have a million dollar portfolio but 99% of Canadians will retire.
Fair, (changed typo by the way) but 99% of Canadians that will retire have more than their own portfolio to live from – certainly the Boomers retiring now, I suspect >30% have some sort of workplace pension to lean on. My generation, GenX, will be less.
Time is arguably one of the 3 largest contributors to the formula. The other 2 factors are savings and your compound rate. It’s pretty simple. If you become diligent with savings and start early with a process automated then all you have to do is focus on your return.
I have called it the Wealth Triangle – https://www.dividendearner.com/wealth-triangle-guide/
Yup. A high savings rate + ability for savings to compound + time + low costs/fees for savings invested = success.
Both this scenario seems a bit unrealistic for your average Joe because at different point in life people will need to save, spend different amounts of money. They are good examples though. Let’s see if you can help on this example or a couple with 2 kids and a new mortgage.
The couple are 35 years old with a 2 and 5-year-old kids.
Currently nothing on RRSP and TFSA, but Able to contribute max on TFSA and RRSP.
About 50k in Cash (where to put this)
30-year 350k mortgage.
~80k combined family income (wife works part time).
Need to consider, Paying Mortgage VS contributing to RRSP/ TFSA. Also, Savings for RESP for Kids education.
What should they do?
Thanks for your comment. My post was for illustrative purposes. I can appreciate all families are different and have various income challenges and priorities to juggle.
Personally, while we don’t have any kids, I would likely prioritize my income as follows:
2. Kid education(s) – RESPs.
This assumes all along folks are paying down their mortgage over time to be debt-free at time of retirement, say age 60 or 65 or whatever.
The reason I put the TFSA over the RRSP is if money is tight, then parents can always use the TFSA to help fund education. RRSP is not as flexible.
All the best and thanks for being a fan.
I might be inclined to consider RESPs a little bit higher just due to the government grants that are available but only if reasonable standby funds are available as RESPs would be inaccessible in the event of some kind of emergency.
I think the government grants are excellent but there are complications with RESPs for withdrawals, especially if not used for educational purposes.
I think in today’s world, the kids have to have a good education for a good future. So with government grant, RESP is a no brainer for me.
I think so too May, we have no kids but I would totally encourage parents to take advantage of this account if they can.
For a dual income family, maybe $1M each in RRSP at age 65 is not a very good choice. Withdrawl without too much tax to pay will be a big problem. But of course it will be a nice problem to have.
My thought is that maxing out RRSP is a no brainer at younger age. Then the RRSP strategy should be reviewed carefully at some point to see what would be the best.
I think if you can max out your RRSP and TFSA, folks should try and do it. A tax problem in retirement all things considered is a great problem to have.
You really need to see a planner/advisor for that.
Because of your situation you may want to minimize income so as to draw the GIS when you retire.
Lots more info needed as to your total financial situation which should be discussed with an expert.
@Heartbeat: You don’t seem to fall under the Low Income category and qualifying for GIS: “I’m on my peek salary currently and can afford large contributions to RRSP.”
So, yes contribute as much as you can to an RRSP and keep maxing out the TFSA. Read my comments above as that’s what I think your objective should be, generating a Growing Income for your retirement. Forget the $1Mil and just work on growing your Income from savings.
Sorry Mark, though you presented a nice overview of RRSP & TFSA, you like most others, refer to “Growing the Pile” on a straight line projection. Yes, it’s Total Return which is important over the long term and using the registered accounts is the best ways to have the money one save grow. Unfortunately, investments don’t grow 6% or 9% per year, every year and there is no way to forecast the growth rate. Maybe over the long term it averages 6% or 9%, but there may be years, many years, where it won’t.
The other items you excluded is what to avoid, such as Hot stocks, Tips, Cyclical stocks and especially frequent Buying and Selling. Though there are some who can make money, and lots of it by doing those things, for most it’ the fastest way to show major losses.
I don’t like suggesting fixed savings percentages, so if one earns less than $30k maybe save 5%, if your earnings increase to $45k to $60k up it to 8% or 10% and certainly if one makes $80k and up increase it to 20% or more.
Finally, invest in ways one understands or in ways that one might have better control. I like investing for Income, not growth (unless one is very market knowledgeable and lucky). By investing for income one might obtain 3% to 4.5% just in dividends, which is half of the 6% to 9% projected growth return. The difference is that likely you will receive that amount of income each year, regardless if the market is up or down. Further, if one concentrated on Dividend Growth stocks ones income should grow, which means that for every dollar one saves they will receive more income in the future and your yield will increase. For example, say you buy a stock which yields 3.5% and increases it’s dividend 5% each year. Each year your yield will grow, so that after 10 years you may be receiving 4.5% to 6% on the total dollars you’ve invested.
I also suggest reinvesting the dividends, unless one can invest larger amounts regularly, say $1,000 or more, Reinvestment promotes compounding.
With Income investing you see the results each month or quarter, either the companies paid the dividend, grew the dividend and has your Income grown from previous periods.
Finally, if the companies are growing their dividend regularly, the price of the shares will follow, eventually. So you not only get a growing income, but the value of your savings will grow as well.
Good post Mark.
Cannew, good explanation above. What you are saying does work. I have seen compound dividends at work on the company stock I have owned for roughly 15 years. Over a roughly 3 year span, I paid no more than roughly $15K-$20K CAD in total for the stocks. Everything is “roughly” cause I didn’t record anything. It’s a blue chip U.S. company, I didn’t pay attention to it and the dividends were DRIP-ing every year. Well, now that single stock alone has grown to a 6 figure U.S. amount.
Hence, I have seen compound dividends (and stock price growth) at work. It is still working as I can’t sell the stock (it’s in my NonReg account) cause I did not record anything about the purchases I made over a rough 3 year period. The stock has changed U.S. brokerages 2-3 times (not my choice, the company did it), so no purchase history there.
I can’t sell this stock now as I do not have detailed info to calculate my ACB (for capital gains tax purposes). Hence, tip for someone just starting their career, if you buy stocks in a NonReg account or participate in a company stock purchase plan, always calculate and record your ACB. Now this stock is causing me some headaches (good headache to have though).
Also happily DRIPping many stocks ILove. I don’t intend to stop.
“I can’t sell this stock now as I do not have detailed info to calculate my ACB (for capital gains tax purposes). Hence, tip for someone just starting their career, if you buy stocks in a NonReg account or participate in a company stock purchase plan, always calculate and record your ACB.”
Agreed. I have the same tips/advice here on this page when it comes to pros and cons of DRIPing:
In case anyone is interested, I just found this from during my research:
The article says at the bottom:
“You could set the ACB at zero, in which case the capital gain would be equal to the sale proceeds of the shares. This will overstate your actual gain, but the CRA likely won’t challenge it because an ACB can’t be less than zero.“
Well, then, this is what I might have to do if I can’t find info to accurately calculated my ACB for the stock. You can sell a small number of shares over many years (esp. if you are retired) so you won’t trigger such a large capital gains tax in any one particular year. This blue chip stock is doing well and giving off good dividends so I won’t sell it until 15-20 plus years from now but it’s good to know that I can do what the above “Globe and Mail” article said above. Hope this helps someone who is in a similar situation to me regarding a particular stock/ETF’s ACB.
Thanks for sharing.
Then again, I would call CRA and get some guidance. Yes, you can put ACB to zero but you can also do some due diligence and find out when you might have purchased shares (brokerage will know); and you can approximate the cost per share via various online stock market tools. That would be my solution – versus going to absolute zero.
@ILD: Seems to me you could look at a chart of the stock and get and idea of the average price over the period you are missing and add in the original purchases to come to an average cost. It would not be 100% but I doubt CRA would argue with it, providing it was a reasonable figure.
I think CRA has bigger issues to deal with, as long as you are conservative and honest in your average price assessments.
What are you buying on the CDN market these days cannew?
Thing is I don’t know for sure which 3 years the shares were originally bought and at what original prices and how many shares were originally bought. The stock has gone to 2-3 U.S. brokerages, I don’t recall the previous 1-2 brokerages names, I just know the current brokerage where it’s currently at. The stock was transferred to the current brokerage in 2013.
I just logged in today at the current brokerage’s website and my stock shows the adjusted acquisition date, adjusted acquisition price, adjusted tax lot shares and adjusted cost basis for each quarter from 2013-2018 years. I wonder if these are parameters for the dividends received in each quarter. I wonder if I can use the latest values of these 4 parameters for capital gains tax purchases when I go to sell the stocks? However, I don’t know the original values of when the stock was purchased or any dividend values older than 2013. Headaches!!!
Original values are important. I would do some digging on various stock charts online, Yahoo, other, and find out prices and go from there – personally.
Fully invested Mark. Sold shares in order to increase my cash holdings and get rid of two stocks I didn’t want to hold, but the was a while back and brought me down to the 13.
Gotcha. Well done. I’m at 32 CDN stocks right now that includes a number of REITs, banks, telcos, utilities and more. Not quite DRIPping all of them but getting closer every year with a few transactions.
I would definitely avoid the hot stocks, tips, cyclical stocks – although I do own KMI 🙁
I also don’t agree with fixed-line savings but again, my post was more for illustrative purposes – meaning there is general reasoning behind the examples not that these examples could possibly apply to everyone. In some years, we’ve put away >$10k into our RRSPs and maxed out our TFSAs. In others years more $$ went into debt repayments. There is no absolutely strategy but I do believe saving often and having a habit of saving will ultimately get most people to where they want to go.
“I also suggest reinvesting the dividends, unless one can invest larger amounts regularly, say $1,000 or more, Reinvestment promotes compounding.”
It absolutely does. Our dividend income has risen quite a bit over the years largely because money reinvested can more money.
Also, when there’s a market correction (we will be in a bear market sometime in the future) dividend DRIP-ing (assuming dividends have not been cut) will automatically buy more shares at lower prices. When the market starts to recover, the number of shares bought at low prices can enable your portfolio to recover faster.
Correct. Always great to get more shares commission-free when stocks on sale 🙂
A great how to with real world examples and nice motivator for Canadian savers/investors.
A million dollar RRSP is a fantastic goal for most people. But because I’m a little greedy, I have a more ambitious plan. I want $1 million in tax free cash in my TFSA.
It’s really not that hard if you’ve been putting money aside for years and have years of compounding on your side. If you’re 25 today just putting in $5000 a year and growing the pile at 7% a year will do it by the time you’re 65.
I’m 34, so that makes it a little more difficult for me. But I have the advantage of being able to contribute the maximum of $57,000 over the years. Give yourself that head start (and max out your contributions going forward) and it happens by the time I’m 65 with a 7% return as well.
And of course there’s the added advantage of having an ambitious goal. Even if you don’t hit it, you’re better off just missing something wild and crazy versus hitting something conservative.
“I want $1 million in tax free cash in my TFSA.” Wow, that would be very impressive! I hope you get there.
That is a GREAT article Mark!
After a couple of more reads, one thing I noticed is the absence of mentioning any use of the resulting RRSP tax rebate. If the RRSP contributions are purely from income, then any use of the rebate can be a crucial component for wealth generation. Some (IME, not many though) take the future rebate into consideration as they calculate what they have available to contribute thus it is already baked in.
Fair point. Let’s assume for illustrative purposes the RRSP-generated refund is reinvested in all cases. Otherwise, as you know, RRSP value is not nearly as big as you think it is – the government loan will need to be paid back at some point via taxation.
Yup, I’ve seen so many people *surprised* at the taxation upon RRSP/RRIF/Annuity withdrawals that I kinda wonder if they really knew what they were doing. I will admit that I was impressed when one of the younger guys at work figured it out to take into consideration the rebate when they were calculating how much per month they could afford to contribute (this was pre-TFSA era). Way to go Brent!
Way to go indeed 🙂