It's not unrealistic to think you could end up with $400,000 or more in lifetime Social Security benefits, but most people probably can't survive 20 or more years of retirement on that alone.
Investing can help you cover the rest, but you have to choose the right investments if you want your nest egg to grow quickly. In this article, we'll look at one affordable option that could easily provide you with more money than Social Security in retirement.
Is this investment your ticket to wealth?
You might think of investing as choosing a bunch of individual stocks, but for most people, it's a lot simpler than that. Using index funds as a foundation for retirement savings is a popular approach. These are bundles of stocks you purchase together. Unlike actively managed mutual funds, which try to beat the average stock market return, index funds try to match it by copying the makeup of the underlying index they're emulating. It usually generates a handsome profit for investors.
For example, the Vanguard S&P 500 ETF (NYSEMKT:VOO) is an S&P 500 index fund, so it contains all the same stocks as the S&P 500 index in roughly the same quantities. As a result, it generates returns that are pretty similar to the index itself, and in the case of the S&P 500, that's pretty good. It has a compound average annual growth rate of 10.7% over the last 30 years. Fees eat into your profits a little, but with this fund, you'll only pay $3 per year for every $10,000 you have invested.
If you invested $250 per month in the Vanguard S&P 500 ETF for 30 years and your investments earned a 10% average annual rate of return, you'd end up with close to $516,000 in the end. That's about $68,000 more than the roughly $448,000 you'd get in Social Security benefits over your lifetime if you signed up at 62, claimed until 86, and received the average monthly benefit of $1,555 per month.
Those who are able to save $500 per month instead of $250 could end up with a nest egg of more than $1 million after 30 years, and that's before you consider any Social Security benefits you'll receive.
A word of caution
While the Vanguard S&P 500 ETF forms a great base for your retirement savings and offers more diversification than investing in a single stock, it's still unwise to put all of your money into this index fund.
For one thing, it's composed entirely of stocks. Stocks offer great earning potential, but they also experience larger short-term price swings than safer investments like bonds. That's problematic for seniors nearing retirement who have large nest eggs they need to protect. A sudden recession could shrink their savings considerably, and they might not be able to wait for share prices to rebound before they have to make withdrawals.
That's why you also need some bonds to help balance out the stocks in your portfolio, and you should gradually shift more of your money into bonds over time. A good rule of thumb is to invest 110 minus your age in stocks. So if you're 40, you'd keep 70% of your money in stocks and 30% in bonds.
You can still earn a decent return with this strategy. Let's say you began saving at 25 and split your $250 monthly contributions between the Vanguard S&P 500 ETF with an estimated 10% average annual rate of return and bonds earning a 6% average annual rate of return. If you followed the 110-minus-your-age rule, you'd end up with close to $481,000 after 30 years. That's still more than a lot of people can expect from Social Security, even though it's taking a more conservative approach.
Those who save for more than 30 years or who are able to set aside more than $250 per month could end up with considerably more than $481,000. When coupled with Social Security, that should be enough to fund a comfortable retirement for a lot of people.
The Vanguard S&P 500 ETF isn't the only great retirement investment out there, nor is it the only S&P 500 index fund out there. But it's worth a closer look if you're interested in an easy way to grow your wealth quickly. There is some risk to investing in it, as with anything, but if you take care to balance your portfolio out with bonds and other safe investments, you shouldn't have to worry about suffering huge losses on the eve of your retirement.