Retiring a millionaire is a lofty goal, but as retirement becomes more and more expensive, you might need $1 million or more to enjoy your senior years comfortably.
It can be difficult, however, to achieve millionaire status if you're a hands-off investor. Investing in individual stocks can help you beat the market and earn higher-than-average returns, making it easier to reach $1 million in savings. But many investors don't want to spend countless hours researching different stocks and managing their portfolios, so this approach isn't right for everyone.
Exchange-traded funds (ETFs) make for an effortless way to invest, as each fund may contain hundreds of different stocks. Can you really retire a millionaire by investing solely in ETFs, though? It depends.
Choosing the right ETFs
The key to making the most of ETFs is to choose your investments wisely, balancing risk and reward. Some ETFs have very low risk, but they also earn lower-than-average returns. Others earn higher returns, but they're also more volatile. To retire a millionaire, you'll need to choose funds that can offer higher returns while still limiting risk.
To choose the right ETFs, look at factors such as how long the fund has existed, its average annual return since its inception, and the companies within the fund.
Keep in mind that an ETF's average returns are only one part of the equation, so try to avoid choosing a fund simply because it's experienced faster-than-average growth. The best funds will also have a long track record of consistent growth over time, and the stocks within the fund should be from fundamentally healthy companies.
If an ETF has a significantly higher-than-average rate of return, that could be a red flag. These types of funds might have existed for only a short time (and never experienced a substantial market downturn), and they might be made up of high-risk stocks. While these funds are tempting, they can also be dangerous: You could potentially lose more than you gain over the long run.
How much can you earn with ETFs?
When in doubt, a solid investment choice is an S&P 500 ETF, such as the Vanguard S&P 500 ETF (VOO 1.47%) or the iShares Core S&P 500 ETF (IVV 1.43%).
S&P 500 ETFs include the same stocks as the S&P 500 index itself, which is widely considered a strong representation of the stock market as a whole. This index has a very long track record of bouncing back from volatility, making it a smart long-term investment.
In addition, it's historically earned an average return of around 10% per year. This means that although the market will have good years and bad years, its annual return should average out to around 10% over the long run.
Say you're investing in an S&P 500 ETF earning a 10% average annual return, and you want to accumulate $1 million by retirement age. Here's approximately how much you'd need to invest each month depending on how many years you have left to save:
|Number of Years||Amount Invested per Month||Total Savings|
As with any investment, the more time you give your money to grow, the more you can potentially earn. By starting to invest now, it will be easier to accumulate at least $1 million by the time you retire.
Reaching millionaire status isn't easy, but it is possible -- even with ETFs alone. By getting started as early in life as possible and investing as much as you can afford each month, you could be well on your way to a million-dollar portfolio.