Most North Americans should end up 'rich'. Or at least let's say they should find themselves set up for a generous and fruitful retirement. It does not take much to build a considerable net worth. And of course, financial planners will tell you that it is that total net worth that might determine your financial fitness or readiness to take on retirement or any other fiscal challenge. Net worth in basic terms is your total assets minus your debts. It's important to work at both ends; building your assets and reducing your debt.
Now we should certainly acknowledge that a significant percentage of North Americans simply do not have considerable cash flow; that after they pay the bills there's simply not much left over. But I do believe that with some digging and the creation of a cash flow statement, most could find a few bucks here and there to squirrel away on a biweekly or monthly basis. In a recent blog post I suggested that Oh Look, I Just Found $888,000 in Your Coffee.
That Starbucks (SBUX) coffee is the poster child for 'needless' spending. Sorry Starbucks shareholders. Do you really need to buy one or two Starbucks coffees a day, plus treats? Do you really need to go out for lunch twice a week? Do you need to buy takeout lunch the other three days? Do you need to go out for dinner every week? Do you really need that gym membership? We can go down the list, but once we start looking, we can find real monies that starts to add up. For example, an average of $5 per day for coffee is $1825 per year. Cut or reduce a couple of expenditures every week and it might not be hard to find meaningful monies that once invested will grow to that sizeable retirement portfolio. And certainly, it may not mean cutting everything and denying yourself some of the special treats that make you happy. It might mean trimming here and there. It might mean having a plan for those treats and sticking to that personal budget.
Full disclosure, at time of writing this article I am at the family Wasaga Beach cottage, and instead of having a coffee at that cottage and using my cell phone plan wifi that I could set up as a hotspot to my laptop, I am at Tim Hortons, (QSR) Canada's coffee shop, and I am enjoying an extra large coffee. I am also enjoying their 'free' wifi. We all have our treats that we might keep, or treats that we will manage. Later in the day I will enjoy a juicy IPA that comes at a cost of almost double a 'regular' beer. That's a choice. If I wanted to, or need to, I could brew my own, coffee, heck I could brew my own beer.
So how do we turn that coffee and the other spending items we found into a $888,000 portfolio? We make those monies work hard. Those monies might work harder than we work. Why? Because those monies are going to work in our sleep. I also answered how hard can they work in this blog post How Much Can You Expect To Make From Your Investments? In that post I referenced some wonderful research from Seeking Alpha author Robert Allan Schwartz with his blog post Annual Returns of the S&P 500 from 1928 to 2015. Robert found that the average return as a compound average growth rate CAGR was 9.5%. But of course there is nothing average about stock and bond market returns, or portfolio returns. But the longer our investment career, the greater odds that we'll grab those 'average' returns. Each period is more than different. As investors in US markets (IVV) know, there can a lost decade such as 2000-2009, and then a period of incredible returns such as the last 9 plus years from January of 2009 when US stocks have delivered over 14% annual. Even over the last full 10 year period to July 31, 2018 the US market using the S&P 500 cap weighted model has delivered over 10% annual. That said, we can't count on 10%, or perhaps even 9% annual returns.
But for starters we'll look at the actual returns for an investor that has found $5,500 per year (from their coffees and elsewhere) - they invest $458 per month in US stocks from January 1990 to end of July 2018. That strategy would create a portfolio with a current value of nearly a million dollars. Yes now you can start to answer the question posed from the rock band The Barenaked Ladies (they are my fellow Scarborough residents - a Toronto suburb) ...
The song and question answered was "If I had a Million Dollars".
The TWRR is the time-weighted rate of return; think of that as more static returns of the market without new investments other than dividend reinvestments. MWRR is the money-weighted rate of return that also takes into account the monthly contributions. We can also call that a personal rate of return.
But perhaps we don't get close to the historical average for stock market returns. Let's take that $458 monthly investment and generate an average 7% annual return.
Over a 30 year period that investment schedule would grow a portfolio to over $558,000.
Over a 35 year period that investment schedule would grow a portfolio to over $888,000.
The above does not take taxation into consideration, but it's possible or likely that an investor could invest that modest sum in a tax free or tax sheltered environment. Investors should also be aware of their potential tax consequence once they begin to spend those monies.
All said, we can see that if one has a very long time horizon (start early folks) and they execute with absolute consistency, one can build a very generous portfolio. It does not take 'a lot' and we might begin even if we can only find $50 or $100 per month. The key might be to find those monies and develop that investment discipline.
And of course 'Rich' is a relative term or definition. Some families or individuals will want enough to live a simple life and cover the basic bills and they will embrace very modest spending plans in retirement. Others will want enough income to live a very active and more expensive lifestyle in retirement. But the key is to ensure that you have enough to fund that desired lifestyle. Know your current spending and investment patterns, know that future you. You might consider getting some professional financial advice that takes into consideration tax advantaged strategies for wealth creation and retirement funding. You can access financial advice at a pay for service arrangement - you don't have to sign up to fork over a percentage of your investment portfolio on a regular basis.
Another key discipline is to create that emergency fund and also build in a comfortable buffer on your overall retirement spending plans. You might underestimate your income and overestimate your spending needs. As we have likely all experienced, we tend to spend more than we estimate. And as always, try to enter retirement with no debt or very low debts. This scary article from the NY Times outlines an unfortunate trend among American retirees. Bankruptcy Booms Among Older Americans. That is the unfortunate reality for those who do not plan, or do not save and invest over the decades.
In the above investment examples we looked at the broad based US stock market. Of course many investors might consider some international diversification (EWC) (EFA) and bonds (AGG) (TLT) to help manage that stock market risk or volatility.
Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. If you'd like notices of future articles, click the "Follow" button.
Happy Investing. Happy Retirement.
Disclosure: I am/we are long AAPL, NKE, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, PEP, TXN, WMT, UTX, LOW, BNS, TD, BLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.