Retirement can be incredibly expensive, and it's possible you may need more than $1 million to enjoy your senior years comfortably.
Few workers have access to a pension or other source of guaranteed income, and Social Security was never intended to be a primary income stream. With rising costs and healthcare expenses continuing to balloon, you may need to save more than you think.
Building a robust retirement fund can be challenging, though, especially if you're not a seasoned investor. The good news is that S&P 500 ETFs are perfect for beginners and experts alike, and with the right strategy, it's possible to reach multimillionaire status by the time you retire.
Image source: Getty Images.
What are S&P 500 ETFs?
An S&P 500 ETF is an investment that contains the same stocks as the S&P 500 index, and it aims to mirror the index's overall performance.
There are plenty of different S&P 500 ETFs to choose from. Some of the most popular options include the Vanguard S&P 500 ETF (VOO +0.75%), iShares Core S&P 500 ETF (IVV +0.78%), and SPDR S&P 500 ETF (SPY +0.74%). All of these funds track the S&P 500 index itself, so they include roughly 500 stocks from the strongest and largest companies in the U.S.
If you're nervous about the effect of stock market volatility on your investments, an S&P 500 ETF is one of your best options. While this type of fund will still experience short-term turbulence, these ETFs are very likely to recover from market downturns.
The S&P 500 itself has a decades-long history of bouncing back from corrections and crashes. Although there are never any guarantees when it comes to the stock market, chances are good that your S&P 500 ETF will be able to withstand any future volatility.
Keep in mind that your investments will still experience ups and downs in the short term, so staying invested for the long run is critical. Trying to time the market is a risky move, so the key is to continue investing consistently -- regardless of what the market does.
Maximizing your earnings
How much could you potentially earn with S&P 500 ETFs? It depends on how much you can afford to invest each month, as well as how many years you're able to let your money grow.
Time is your most valuable asset, so the longer you're able to hold your investments, the more you can earn. By giving your ETFs decades to build, you can potentially retire a multimillionaire -- all without having to pick stocks or perfectly time the market.
Historically, the S&P 500 itself has earned an average rate of return of around 10% per year. Again, the market will experience short-term volatility, so it's unlikely you'll earn 10% returns every single year. Some years you'll earn higher returns, while other years you may even experience losses. Over the decades, your returns should average out to roughly 10% per year.
Say you want to accumulate $2 million by the time you retire. Assuming you're earning a 10% average annual return on your investments, here's how much you'd need to invest each month depending on how many years you have to save.
| Number of Years | Amount Saved Per Month | Total Savings |
|---|---|---|
| 40 | $380 | $2.018 million |
| 30 | $1,050 | $2.073 million |
| 20 | $3,000 | $2.062 million |
| 10 | $10,500 | $2.008 million |
Data source: Author's calculations via Investor.gov.
Again, time is an incredibly powerful resource. Even if you can't afford to save much, you're better off starting to invest now rather than waiting a few years. The longer you put off investing, the more you'll need to save later to catch up.
S&P 500 ETFs can be a fantastic choice, especially if you're looking for a "set it and forget it" type of investment that requires little to no upkeep. By simply investing as much as you can afford each month and leaving your money alone to grow, it's possible to retire a multimillionaire.
