Retiring on less than a $1 million nest egg is pretty tough these days, but saving that much is no easy feat either. To get there, you need the stock market -- and more importantly, you need the right investments.
There are many securities that could help you retire a millionaire, but here's one idea if you're looking for a simple, low-cost investment known for some pretty impressive returns.
Why investing in ETFs is a great choice for retirement
Exchange-traded funds (ETFs) are a great choice for workers trying to save for retirement because they provide instant diversification, usually at an affordable price. They're bundles of stocks you purchase together. So if you invest in an ETF composed of 100 stocks, you own a small portion of all 100 of these companies.
There are ETFs that focus on specific sectors, as well as ETFs that offer broad market exposure to many sectors. If you choose an ETF that contains strong companies in several industries, it could be one of the only investments you need for retirement.
ETFs tend to have low expense ratios, or annual fees, too. These are a percentage of your assets you pay annually to the fund manager. You typically don't want your expense ratio to exceed 1%, but this isn't an issue with most ETFs as many have fees well under 0.50%. These lower fees mean you hold onto more of your money.
Could the S&P 500 be your ticket to wealth?
Some of the most popular ETFs are S&P 500 index funds, like the Vanguard S&P 500 ETF (NYSEMKT:VOO). These funds contain stocks in all 500 companies that make up the S&P 500 index in roughly the same quantities. They do a pretty good job of mimicking the performance of the index itself, which has been pretty impressive over time. The S&P 500 has a 13.9% average annualized return over the last 30 years.
If you invested $500 per month in the Vanguard S&P 500 ETF and it earned a 13% average annualized return over the next 30 years, you'd end up with over $1.86 million.
In reality, you'd probably end up with a little less than this because of fees, but still, it's not a bad nest egg. If you invested a little more or kept your money invested in the Vanguard S&P 500 ETF, you could easily end up with over $2 million after 30 years. Coupled with Social Security, that should be plenty for most people's retirements.
If you choose to invest in the Vanguard S&P 500 ETF, you won't beat the market because that's not what an index fund is designed to do. But for most investors, trying to match the market is often a better strategy. Even the best hedge fund managers rarely manage to beat the market, and many actively managed funds offered by these managers perform worse than index funds over the long term.
The Vanguard S&P 500 ETF isn't the only investment that can help you retire a millionaire. It's not even the only S&P 500 index fund out there. They're all pretty similar, but if you want to compare the Vanguard S&P 500 ETF to some of its competitors, look into their average returns and their annual fees. Some other options to consider are the iShares Core S&P 500 ETF and the SPDR S&P 500 ETF Trust. Take a look at all of them before deciding which is right for you.