How a Single Index Fund Can Help You Retire a Millionaire

A good rule of thumb to follow is to assume you'll need at least 80% of your pre-retirement income to maintain your current lifestyle in retirement. If you're currently making $80,000, you'll need $64,000 annually in retirement; if you're currently making $100,000, you'll need $80,000.

To produce that level of income in retirement, many people will need over $1 million in retirement savings and investments to live the way they want. But $1 million is a good starting baseline. Here's how one single index fund can help you retire a millionaire.

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Index funds can make investing easier

Index funds are passively managed funds that follow a set index. Some indexes may be based on where the companies are located, on the industry, on the dividend payout, or on market cap. Take the S&P 500, for example. The S&P 500 consists of roughly the largest 500 U.S. companies by market cap, and it's one of the more popular indexes used.

While the S&P 500 is an index, different brokerage companies put together a specific fund that mirrors the index and the companies within, like the Vanguard S&P 500 ETF (VOO -0.84%) and SPDR S&P 500 ETF Trust (SPY -0.87%). Although they both follow the same S&P 500 index, there are differences between the two, such as expense ratios and the exact weight of holdings in the fund. 

Consistency is important

Using dollar-cost averaging is one of the most efficient ways to accomplish your long-term financial goals. It involves making specific investments at set intervals regardless of each stock's price at the time. These investments can be daily, weekly, monthly, quarterly, or whatever works for you. Outside of being consistent and getting in the habit of investing, using dollar-cost averaging helps take some of the emotions out of investing and the urge to want to time the market -- something that's virtually impossible to do consistently over time.

Compound interest was deemed the "Eighth Wonder of the World" by Albert Einstein and for a good reason. Compound interest involves earning interest on your interest, and it's one of the keys to helping you retire a millionaire. If you strictly saved and didn't invest for 30 years, you would have to put aside more than $33,000 annually to reach $1 million. Even those making $100,000 will likely find this virtually impossible to do.

One index fund can do the trick

While the exact percentage varies year to year, the S&P 500 historically returns around 10% annually over the long run. With a single fund like the Vanguard 500 Index Fund ETF, which has an average annual return of 14.54% over the past 10 years, you can become a millionaire. By solely contributing to the Vanguard 500 Index Fund ETF, here's how long it would take you to achieve $1 million with 10% annual returns (9.97% after the expense ratio):

Data source: Author calculations.

For people born after 1960, the full retirement age (as deemed by Social Security) is 67. Even those who don't begin investing until their mid-30s can accomplish $1 million by making consistent and relatively modest monthly contributions. Of course, the sooner you start, the better.