Many people dream of retiring with millions of dollars to their names. And with the right strategy, that's certainly possible.
If you're serious about retiring with a lot of wealth, your best bet is to start investing from a young age. That will give your money more time to grow.
But how should you invest your money? If you're not particularly well-versed in picking stocks, you may decide to fall back on the broad market, instead. In fact, you can actually grow a large amount of wealth by investing in the S&P 500 index alone. But whether that's the right choice will depend on your ultimate goal.
You can bank on the S&P 500
The S&P 500 index consists of the 500 largest publicly traded companies by market capitalization. If you load up on S&P 500 index funds and hold them for many years, there's a good chance they'll gain a lot of value -- enough to make you a millionaire by the time your retirement rolls around.
From 1957 through 2021, the S&P 500 index has delivered an average annual return of around 10.5%. That return accounts for strong years on the part of the index, as well as years during which it underperformed.
If you invest $400 a month in S&P 500 index funds over a 40-year period, you might enjoy a 10.5% average annual return on your money. And in that case, you'd be looking at over $2.4 million at the end of the day.
That said, while you can retire a millionaire on the S&P 500 alone, you may want to look at specific companies for a chance at even higher returns. Many individual stocks have managed to outperform the S&P 500 through the years, so if you're comfortable researching stocks individually, that could be a good bet.
However, if you're happy to have a portfolio with a performance that essentially will be in line with the broad market, then there's no need to handpick stocks if that falls outside your comfort zone. Clearly, the S&P 500 itself is more than capable of generating strong returns over time, and if you invest consistently for many years, that alone could make it possible to retire a millionaire.
A hybrid approach could work
While many investors do very well for themselves focusing on S&P 500 index funds, you may decide to invest some of your money in the broad market and some in individual stocks. And that's actually a pretty smart approach to building wealth.
The S&P 500 funds you retain will give you a solid investment you don't really need to track or think too much about. At the same time, by putting some of your money into individual stocks, you'll have a chance to generate even stronger returns in your portfolio.
No matter what investing strategy you land on, though, the key is to give your money as much time as possible to grow. We just saw that it's more than possible to retire a millionaire by investing in the S&P 500 only. But going back to our example above, if we shrink that savings window from 40 years to 30, our nest egg balance drops to $868,000. While that's not a small amount of money, it's definitely not the same as retiring with millions.