Could a portfolio loaded with S&P 500 index funds help you meet your retirement goals?
Sept. 4, 2020
This article originally appears on The Motley Fool, written by Maurie Backman.
Though it’s possible to enjoy retirement with less than $1 million to your name, aiming for that much cash or more is certainly a worthwhile goal. But if you want to retire with lots of money, you’ll need to invest your savings through the years. Leave that money in cash, and it won’t grow the way you need it to.
Of course, the problem with growing wealth via individual stocks is that you’ll need to prepare to spend a lot of time researching companies and keeping tabs on their cash flow and performance. It’s an effort that could pay off very well in the long run, but also take up a lot of your time.
If the idea of building an extensive retirement portfolio sounds overwhelming, here’s another idea: Load up on S&P 500 index funds.
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Index funds are passively managed funds that track existing market indexes, and with an S&P 500 index fund, you get exposure to the 500 largest publicly trading companies on the market. Buying S&P 500 index funds gives you instant diversification and takes a lot of the guesswork you’d normally have to grapple with out of the investing equation.
But if there’s one drawback to index funds, it’s that they only seek to match the performance of the indexes they follow; their goal isn’t to beat the market. As such, you may be wondering: Could S&P 500 index funds really help you become a millionaire in time for retirement? Well, let’s find out.
A solid long-term bet
The S&P 500 didn’t actually adopt 500 stocks until 1957. But between then and 2018, it’s delivered an average annual 8% return.
Now, let’s see what that might do for your retirement. Imagine you’re 30 years old and want to retire at 67, which is what’s considered full retirement age for Social Security purposes for anyone born in 1960 or later. If you manage to sock away $500 a month over that 37-year timeframe, and you invest that money in S&P 500 index funds that deliver an 8% average yearly return, you’ll wind up with over $1.2 million.
Of course, this is just one example. Not everyone has a 37-year savings window and not everyone can afford to part with $500 a month (though you might have a longer savings window yourself, or a shorter window but the ability to save a lot more on a monthly basis). And also, the S&P 500 is not guaranteed to deliver an average yearly 8% return between now and your target retirement date. But is it possible to retire a millionaire by focusing your investment strategy on S&P 500 index funds? Absolutely.
Now keep in mind that it’s a good idea to have some conservative investments in your retirement portfolio when you’re younger, and that you’ll absolutely need to shift toward safer investments like bonds as retirement nears. But if you put a large chunk of your savings into S&P 500 index funds, there’s a good chance they’ll deliver as they’ve done in the past. And that means you have a real opportunity to close out your career with $1 million or more, and subsequently enjoy the retirement of your dreams.
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