Home » Investing » Millennials: 1 ETF Is All You Need to Retire Wealthy
BMO Low Volatility Canadian Equity ETF (TSX:ZLB) is a terrific one-stop-shop investment that can help millennials grow their retirement wealth.
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Joey Frenette
Joey Frenette is a journalist, University of British Columbia graduate, ex-engineer, Warren Buffett fanatic, and Fool who's completed CFA Level 1. He’s been investing since 2014 and is always on the hunt for value, regardless of the market "weather." Before writing at The Motley Fool, Joey worked as an analyst/developer at several Canadian small- and mid-cap software firms, including Syscon and Avigilon. Beyond Motley Fool, Joey’s work can be found at TipRanks and MoneyWise Canada. Follow him on Twitter @realJoeFrenette
For young investors like millennials, choosing to invest today rather than letting cash collect dust in low-interest savings accounts can mean the difference between a comfortable retirement and a frugal one. Through the difficult-to-fathom power of long-term tax-free compounding, you may even be able to enjoy a lavish retirement or the freedom to hang up the skates far earlier than 60.
The sooner you start investing, the better. It can transform the retirement pipe dream of many millennials and turn it into an inevitability, even taking into consideration the last two crises that wreaked havoc on the millennial cohort’s pocketbook.
You’ve probably heard that passive investors can do well over the long term by sticking with run-of-the-mill index funds. And you’ve also probably heard from passive-investing enthusiasts that it’s hard to beat the markets consistently over the long term.
Their mantra is, “if you can’t beat them, join them.” While index fund investing may be suitable for certain people, settling for average may not be the best course of action for many millennial Canadians who are capable of getting better-than-average results over prolonged periods by maintaining the proper temperament.
Moreover, the coronavirus crisis has created a volatile market environment where DIY investors are in a spot to separate the good from the bad. Given the massive uncertainties, Mr. Market is likely less efficient at pricing stocks, which means there’s more opportunity for self-guided investors to find securities at discounts to their intrinsic value.
Beating the TSX doesn’t have to be difficult
Beating the TSX Index, which is a poor investment on its own given its lack of proper diversification across sectors, constantly over the long run is possible, especially if you’re one to buy stocks while everybody else is panicking amid a crash. In the heat of the moment, the coronavirus crash in February and March was horrifying. It seemed like stocks would continue tumbling, with no recovery in sight, with the word depression being thrown around in the mainstream financial media. If you held your nose and bought something amid the carnage, you did ridiculously well over the following months, even if you missed the bottom by a wide margin.
As it turned out, the coronavirus crash was one of the best buying opportunities in recent memory. Any attempt to time the bottom, act on emotion or even act based on the economic fundamentals led you to miss out on rapid gains across most overly battered securities. If you were a stock picker, you were also capable of recognizing the difference between securities that were unfairly hit (companies that stood to be minimally impacted by the pandemic) from those that deserved to be hit (companies that were at “ground zero” of the crisis).
One ETF is all you need
Passive investing isn’t all a bad idea at this juncture, though as long as you look beyond the TSX Index to more diversified indices such as the BMO Low Volatility Canadian Equity ETF (TSX:ZLB), which represents consumer discretionaries, utilities, and communication services far better than the TSX Index, which is mostly financials and energy stocks, two of the hardest-hit industries by the coronavirus crisis.
While the low-volatility ETF didn’t live up to its name amid the last crash, I think the one-stop-shop investment is still worth picking up, as volatility is likely to continue for the duration of this pandemic. The ETF also holds some reliable dividend payers that tend to zig when the markets zag, and the management expense ratio (MER) of 0.39% is a low price to pay relative to the better mix of lowly correlated securities and better diversification relative to the likes of the TSX Index.
The ZLB as a play on the return to value
Most importantly, I believe the ZLB is a great play on the return to value. Growth stocks have led the latest upward charge, but once the tides turn, we could witness a growth-to-value rotation that could propel value stocks much higher. If you’re looking for a catch-up trade with lower-volatility value stocks, the ZLB is a great bet, with an overweighting in mature stalwarts, most of which are considered value — not growth — stocks.
Financial experts suggest that, depending on various economic factors including inflation, millennials may need between $3 million and $4 million to ensure a comfortable retirement. To achieve this goal by 2045, when most will be in their 50s, they will likely need to aim for the higher end of this range.
Since then, the ETF has delivered an average annual return of 8.66%. You'd have a nest egg of over $1.18 million if you invested $3,600 per year over 40 years. Historically, small-cap value stocks have achieved average annual returns of a little over 14%.
Gen Z are more bullish on early retirement than millennials—and the majority think they'll be able to get by on just $500,000 in savings. Some Gen Zers anticipate working for just two decades before kicking up their feet and living off just $500,000 for the following 60 years.
A good plan isn't just about the size of your nest egg. It's also about how you manage these three things: taxes, investment strategy and income planning.
Data from the Employee Benefit Research Institute, based on the Federal Reserve's Survey of Consumer Finances, reveals that a mere 0.1% of retirees manage to accumulate over $5 million in their retirement accounts, whereas only 3.2% amass over $1 million.
In a nutshell: Yes, ETFs alone are enough to make you rich. With just one investment, you can capture the growth of the overall stock market or a certain segment of it. For example, you can find ETFs that focus on pretty much any industry, investment theme, or region of the globe.
Billionaire investors like Warren Buffett and Ray Dalio are known for their stock-picking skills. Both of these heavyweights own ETFs, as well, with Dalio, in particular, holding large positions.
Can you live off ETF dividends? While it is possible to live off ETF dividends, you'll need to do some careful planning to make it happen. You'll need to balance how much income your investments bring in, and how much you spend.
By some measures, millennials lag on retirement preparedness and net worth relative to older generations such as Gen X and baby boomers. There are many reasons for this, such as a shift away from pensions toward 401(k) plans and high student debt burdens.
Despite Increasing Salaries, Gen Z and Millennials Can't Afford Houses. “This is a resilient response to the very dramatic increase in rental burden. The average proportion of a person's income that goes to rent was 25% in 2000, and it's now 40%. That's really a striking increase,” Wachter said.
Nevertheless, the average Gen X retirement savings balance (nearly $130,000 for individuals and $243,000 for households) suggests that many higher earners may not be saving enough, if those savings are intended to be one's main source of income in retirement.
The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).
Let's say you consider yourself the typical retiree. Between you and your spouse, you currently have an annual income of $120,000. Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.
So, if you're aiming for $100,000 a year in retirement and also receiving Social Security checks, you'd need to have this amount in your portfolio: age 62: $2.1 million. age 67: $1.9 million.
It may be possible to retire at 45 years of age, but it depends on a variety of factors. If you have $500,000 in savings, then according to the 4% rule, you will have access to roughly $20,000 per year for 30 years. Retiring early will affect the amount of your Social Security benefit.
Despite Increasing Salaries, Gen Z and Millennials Can't Afford Houses. “This is a resilient response to the very dramatic increase in rental burden. The average proportion of a person's income that goes to rent was 25% in 2000, and it's now 40%. That's really a striking increase,” Wachter said.
Retiring at age 65 with $6 million is entirely possible, even for people with quite comfortable lifestyles. Conservative investment and withdrawal plans allow for ample retirement income for most people retiring in those circ*mstances.
Millennials stand to become the richest generation in history, after $90 trillion wealth transfer. Millennials are set to inherit as much as $90 trillion in assets before 2044, a new report shows.
Introduction: My name is Horacio Brakus JD, I am a lively, splendid, jolly, vivacious, vast, cheerful, agreeable person who loves writing and wants to share my knowledge and understanding with you.
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