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Save for retirement now while time is on your side

Gail Johnson
Some Canadian currency.

If you want to be inspired (or possibly depressed) by someone who's really grasped the concept of "Start Saving for Retirement Now!", look no further than the founder of

The man behind the blog, who goes by the moniker FrugalTrader, is a 33-year-old married engineer living in Newfoundland. A request by Yahoo! Canada Finance for his identity was declined.

FrugalTrader's goal: to reach a net worth of at least $1 million by the time he turns 35 in 2014. He started his journey in 2006 with a net worth of about $200,000. That figure is now up to around $670,000, and he has no debt except for a small investment loan.

"I began investing in mutual funds when I was 16-years-old and the passion for finance grew from there," the FrugalTrader writes, noting he stays anonymous because he discloses all his financial information and understandably doesn't want his employer and coworkers to know about his financial situation.

"When I graduated from university -- I was 23 -- I started getting more serious about the stock market and real-estate investing," he writes. "Since I started young, I have built an equity portfolio that has been growing gradually over the years ... Is the goal too high? Am I naive? I don't think so, but only time will tell."

Pay yourself first

The MillionDollarJourney guy first learned about this concept while reading The Wealthy Barber back in high school, and he says the technique is simple but powerful.

"As the concept explains, you put a portion of your income into a savings account automatically," he writes. "When I say automatically, you either program your online bank account to do an automatic electronic transfer on payday, or get your employer to do an automatic transfer out of your paycheck. You would be surprised how fast your savings nest egg can grow."

He figures that he and his wife save approximately 15 to 20 per cent of their gross income.

The power of automation

Like the MillionDollarJourney blogger, financial professional and Retire Happy founder Jim Yih is a big fan of automatic withdrawals for saving purposes. You don't miss that monthly or biweekly sum because it's gone before you can even think about spending it.

"There's definitely something to be said in this very complex world about automating your finances," Yih says. "Most of us don't have that natural discipline to save, so the better way to save is to automate it."

Look at the numbers. If you put aside $100 per month and contribute that $1,200 annually toward an RRSP that generates a 5 per cent rate of return over 40 years, you'll have $153,408.

The earlier you start the better. If you wait until your 40s to save for retirement, some estimates say you'll have to put away as much as 15 to 20 per cent of your income. But if you start in your early 20s, you'll only have to set aside between 3 and 5 per cent.

The power of dollar-cost averaging

Simply put, this a buying strategy that works the same way as those automatic pay-yourself-first withdrawals. You systematically direct a fixed amount of money periodically to buy investments with a fluctuating price.

When prices drop, investors systematically take advantage of that by buying more units of the same investment, Yih explains. The power of dollar-cost averaging happens when the price rebounds because you now have that many more units working for you.

"Dollar-cost averaging is an investment strategy that helps investors fight the emotions of a downturn in the markets and potentially profit from systematically buying low when prices fall," Yih says. "If you're in the accumulation phase of life trying to save up for retirement, you're buying RRSPs and putting money away for the future, when you're investing money it's better to invest it on a systematic, monthly basis.

There are some cases where the strategy works better than others, however, MillionDollarJourney founder says.

"It works well with low management expense ratio (MER) index mutual funds," he says. "The reason is because you can purchase a set dollar amount every month and receive partial shares without any commissions or fees.

"It does not work that well with purchasing individual stocks if the investor is being charged a trading commission for every purchase," he adds. "For example, if someone puts $100 towards a stock every month, a $5 trading fee is 5 per cent of the purchase price ... My rule of thumb is to keep trading commissions under 1 perccent of the purchase price."