Millennials: This Easy 3-Step Plan Could Make You a Millionaire in 20 Years

A traditional working life is often longer than 40 years, starting in your early 2os and lasting until age 65. Who wants to spend that long chained to a desk?

It doesn’t have to be this way. A group of savings junkies has discovered a way you can stop working in half (or less, if you’re truly hardcore) the normal time. It’s quite possible. Thousands of people are living the dream, retired from the normal nine-to-five grind at an age young enough that they can truly enjoy their time off.

Sound good? Of course it does. Here’s how you can get there in 20 years.

Save a tonne

Unless you’re expecting an inheritance from Great-Aunt Hortense, you’re going to have to save a lot to make your early retirement dreams come true.

The math roughly works like this: if you can save 50% of your income and get a 5% return over time, then you should have enough to retire in about 20 years. This also assumes you can keep your living expenses the same once you stop working for good. Many folks spend more in their golden years because they need to fill the time with something.

Saving 50% of your income is no easy task. Folks making a middle-class wage in an expensive city might find it impossible, but don’t stress just yet. You might be able to pick up extra income by getting a promotion, working extra shifts, or starting a side business. Expenses can be slashed to the bone by downsizing either to a smaller house or completely different city and by getting rid of your car.

One word of advice before you start down this path: in theory, your wage can increase forever. After a certain point, it’s impossible to cut more expenses. I’d focus on the top line.

Take advantage of TFSAs and RRSPs

An RRSP is a powerful savings tool for the average Canadian. It’s all the better for the early retiree.

Say an early retiree started putting cash away in a RRSP at age 22. They’re now 45 and retired, and that account has grown to a sizable sum.

If there were little or no other income, an early retiree could take money from that RRSP and pay very little tax. Combine that with a portfolio with plenty of dividends, and we’re looking at a way to make up to $50,000 per year tax free.

And remember, withdrawals from TFSAs can always be done tax free.

Pick great stocks

We’ve already established an early retiree can stop work in about 20 years if they get a 5% return on their investments. But what if they do much better?

Say you’re able to get a 10% return on your money, which is about in line with historical averages. All you’ll need to do is put away $17,000 annually to end up a millionaire in 20 years. That $1 million could then easily spin off $40,000 annually in dividends, which is enough to live comfortably in many cities.

So, which stocks should you invest in to generate those kinds of returns?

National Bank of Canada (TSX:NA) is one. Canada’s sixth-largest bank is still a behemoth in its own right with a market cap of more than $20 billion. The bank is still somewhat focused on Eastern Canada, which means it has plenty of opportunity to grow both westward and internationally.

It has quietly put up some eye-popping returns over the last 20 years, with shares up 12.86% annually if dividends were reinvested. That’s enough to turn a $10,000 investment back in 1999 into one worth just over $112,000 today.

Empire Company (TSX:EMP.A), the parent company of Sobeys, Safeway, and various other grocery banners, is another great long-term buy-and-hold stock. Although the 2014 acquisition of Safeway was jeered at the time — critics thought Empire paid too much — the company has done a nice job turning things around after the Safeway era got off to a rocky start. Management streamlined operations and cut unnecessary costs, and it’s been working. Recent results have beaten expectations, and Empire’s stock is flirting with a five-year high.

Empire has been another great long-term performer, with shares up 10.23% annually over the last 20 years, including reinvested dividends. That’s enough to turn a $10,000 investment into one worth $64,386.

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Fool contributor Nelson Smith has no position in any of the stocks mentioned.

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