Retire with a million dollars? It’s possible. Here’s how

An ETF is a fund that owns a diversified mix of assets, such as stocks, bonds and commodities, but is traded on stock exchanges as individual stocks. “ETFs provide the opportunity to acquire essentially an entire diversified portfolio through one fund,” says Bortolotti.

It may seem like you're only buying one product, but “if you open your eyes to these ETFs, you'll see literally thousands of stocks—in fact, some of them will have over 10,000 individual holdings of stocks and hundreds of bonds,” Bortolotti explains. “They are more varied than anything you could build yourself.”

ETFs are similar to mutual funds; The main difference is that ETFs trade like individual stocks. Mutual funds also require more active portfolio management and are generally more expensive than ETFs. “It's possible to find extremely cheap ETFs, whereas it's quite difficult to find extremely cheap mutual funds,” Bortolotti says.

In short, an ETF creates a diversified, low-maintenance portfolio that essentially runs on its own while keeping costs low—and can actually pay for itself over time.

Assuming a 5.5% rate of return, you could build a $1 million ETF portfolio by age 65 if you start investing $595 per month at age 25, Bortolotti says; $1,122 at age 35; or $2,332 at age 45.

With so many ETFs available, Bortolotti understands why people might be afraid to choose the right ones for their portfolio. “I think it's also fair to say that the vast majority of them can be completely ignored by the average investor,” he says.

Asset allocation ETFs, which offer complete, diversified investment portfolios in a single product, are “the most valuable and important product to come out of Canada in the last decade” and are the best place to start when it comes to creating a simple long-term investment plan, says Bortolotti.

“There are literally billions of dollars invested in these types of balanced mutual funds,” Bortolotti says. “The difference with asset allocation ETFs is that they are extremely cheap,” with fees to compensate the fund company ranging from 0.18 to 0.25 percent—about one-tenth of what balanced mutual funds have cost in the past.

Robb Engen, a financial planner and personal finance blogger at Boomer & Echo, agrees that asset allocation ETFs are the best option. “I can’t stress enough how much of a game changer it has been for the do-it-yourself investor,” he says.

All major ETF providers, including Vanguard, iShares and BMO, have a family of asset allocation ETFs.

ETFs with a balanced asset allocation, such as Vanguard's VBAL, iShares' XBAL and BMO's ZBAL, hold 60 percent stocks and 40 percent bonds. Over long periods of time, balanced portfolios have historically returned an estimated 5.5 percent per year after fees.

Growth ETFs such as VGRO, XGRO and ZGRO have an asset structure of 80 percent stocks and 20 percent bonds. They are best used for those who are more risk averse as they can be more volatile. Over long periods of time, this set of assets can generate returns of about 6.2 percent per year after fees.

When building an investment portfolio, it is important to understand how much risk you are willing to accept.

A 60 to 40 balance of stocks and bonds is usually a good starting point. For younger Canadians who can afford to take more risks, an 80 to 20 balance may be appropriate.

You can adjust your asset allocation as you get older. By the time you retire, you may need a mix of 50 percent stocks and 50 percent bonds.

Bortolotti notes that many young Canadians have lower incomes, mortgages and children. “You can't blame yourself for not being able to save 10 to 15 percent of your income when you're in an entry-level job,” he says.

It's okay to plan for big expenses, like a mortgage, when you're younger, and then when you reach peak earnings—even if that won't be until you're 40—to increase your savings. Once your mortgage is paid off, you can redirect all that money into savings and investments, and that money will grow quickly.

If you can only afford to contribute $25 a month, you may not get $1 million, but years of compound interest will still give you a nice return.

Unlike mutual funds, you cannot buy ETFs at bank branches. Each bank (including RBC, TD and BMO) has its own brokerage division where you open a self-service account online.

You can also open an online investing account with a low-cost or free online broker such as Wealthsimple, Questrade and Qtrade. You can link these accounts to your main bank account and deposit your funds that way.

When you invest in ETFs through an online broker, you make all the decisions yourself. If you buy one asset allocation ETF, you only have one decision to make. If you want to buy multiple ETFs, Bortolotti says, you'll need to have some knowledge of how to build a properly diversified portfolio.

If you want to choose a plan that's already designed, you can use a robo-advisor (like Justwealth). “These services have model portfolios consisting of several ETFs that they have selected for you,” explains Bortolotti.

Some banks and brokerages also offer robo-advisors. For example, you can open a regular account with Questrade and select your own ETFs, or use their Questwealth Portfolios service and let them select ETFs for you for an additional 0.25 percent fee.

Bortolotti advises looking for a brokerage that doesn't charge commissions, especially if you regularly deposit small amounts.

“If you invest with the big bank brokerages, most of them still charge $10 per trade,” he says. That's fine if you're pouring thousands of dollars into your investments a couple of times a year, but if you want to set a monthly premium of $100 when you're just starting out, those fees could increase your costs by as much as 10 percent.

If you receive a regular paycheck, set up automatic contributions to your ETFs for each payday. “It's just a good habit,” Bortolotti says. “You probably won't lose money after a while, and this is the best way to ensure you reach your savings goals.”

There's nothing worse for a long-term savings strategy to fail than waiting until “a good time to invest,” Bortolotti says. “A good time to invest is when you have a plan and money to spare. You must be disciplined with your savings and ignore short-term market volatility.”

Over time, with continued contributions, the interest on the ETF will increase significantly. Interest compounds exponentially, meaning the real power comes later.

Let's say your portfolio today is $1,000 and you're making a five percent return. Next year you will receive interest on $1,050. “You get interest on interest every year, and that has a really huge effect over time,” Bortolotti says. Once you get to $100,000 and get the same five percent return with the exact same portfolio—you'll now make $5,000 in one year.

“The earlier you start, the sooner you start rolling the snowball down the hill, the bigger it will be when you reach middle age, and then it will become really powerful,” Bortolotti says. The tipping point comes when your portfolio's investment growth exceeds your annual contribution, or when “your portfolio is doing more of the heavy lifting than you are doing,” Bortolotti says.

You can also set up a dividend reinvestment plan (DRIP), where instead of paying out cash, dividends from the ETF buy more shares. This way, you use the growth of your investment to buy more shares, which is another powerful way to compound interest, Bortolotti says.

Ultimately, successful ETF investing is about broad diversification, low costs, as much investment automation as possible, and a disciplined strategy, Bortolotti says.

The biggest takeaway? “Just get started,” Engen says, even if you only have $20 a month to invest. The power of compound interest will still work in your favor.

Investing in asset allocation ETFs isn't called a “couch potato” investment strategy for nothing: it's all about investing in broadly diversified funds, without picking stocks or timing the market. Once you have it set up, you can sit back, relax, and watch your savings grow.