If you're looking for investment options that can help you retire a millionaire, it's going to be helpful if you're still more than 25 years away from signing off on your last day of employment. First, there's far more stress involved if you get a late start (64% of people start to save for retirement in their 20s or 30s). Second, that timeframe gives you plenty of time to strategize and put a retirement plan in place.
When developing that retirement plan, most investors will be better off going with exchange-traded funds (ETFs) as an alternative to picking individual stocks. ETFs are well suited to helping you build a portfolio capable of growing to that seven-digit threshold. Of course, the risk level you can tolerate and the amounts you're able to steadily contribute will be key factors in determining just how much your portfolio will be worth on the day you retire, but these three Vanguard ETFs can set you on the right path.
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What does it take to retire a millionaire?
All of these ETFs feature at least a moderate level of risk (with one, the risks are appreciable higher), but investors looking for substantial returns should expect that. It's difficult to generate big growth through funds that offer lower risk because long-term rates of return are often tied to a fund's risk level. But if you're one of the 64% who is starting your retirement investing journey in your 20s or 30s, then taking on a bit more risk is reasonable. In market corrections, you'll have plenty of time to allow your investments to recover from short-term or even medium-term stumbles.
If the level of risk you're prepared to shoulder matches that of these ETFs, the returns will likely be well worth it for long-term investors, who could enjoy an average annualized return of 13% -- the average for these three funds since their inceptions 12 or more years ago -- for the next 30 years.
Financial advisors generally suggest that people invest between 10% to 20% of their after-tax income per year for retirement. If you bring in $36,000 per year -- the median annual income in the U.S. -- your after-tax income would be roughly $29,000. At the mid-point of the suggested range (15%), that would mean you should invest $4,300 a year.
Let's look at what those $4,300 annual contributions could become in 30 years.
1. Vanguard S&P 500 Growth ETF
The S&P 500 has produced an average annualized return of 10% since 1928, and ended the year with a gain 64 out of 93 times. Of course, it's down considerably so far in 2022. But good news -- in the years that followed declines of at least 12.8% (the current S&P 500 return for 2022) the index has produced positive returns 71% of the time. For long-term investors, that makes the current down market a more promising opportunity.
The Vanguard S&P 500 Growth ETF (VOOG 0.04%) tracks the performance of the large-cap growth companies in the S&P 500. This gives it a heavy exposure to tech stocks -- 44% of total asset weight. By weight, its holdings are led by Apple and Microsoft, but its top 10 list is rounded out by investments in Home Depot, Eli Lilly, and Thermo Fisher, reflecting a diversification that takes a bit of the edge off of inevitable tech sector volatility.
Over the past 12 years, the ETF's average annualized return has been 17.4%. And over the past 10, it has returned 16.7% annually, beating out the average large growth fund by 2 percentage points. Assuming long-term growth in line with the historical average, a $4,300 annual investment -- 15% of after-tax salary -- would be worth $119,000 after 10 years. But continuing to add that $4,300 per year and allowing those returns to keep compounding, after 30 years, the total value would crank up to over $3.5 million. And because this ETF has an expense ratio of 0.1% -- much lower than the 0.9% average for similar funds -- more of that money will stay with you.
2. Vanguard Information Tech ETF
The Vanguard Information Technology ETF (VGT 0.16%) is also heavily focused on tech stocks, and due to its nature as a sector-specific ETF, it's the riskiest of these three funds. However, it is diversified within the sector across software, semiconductors, services, and hardware. That won't offer much of a cushion in the event of a major decline in the whole tech sector, but it could help if one segment performs well while others drop.
Investors who don't mind the level of risk here can benefit from the heavy reliance on the tech sector. This ETF has produced an average annual return of 13% over the 17-year lifetime of the fund, highlighted by a 3-year annualized return of 24% during the end of our recent bull market. Results like that could recur once the ongoing bear market in tech comes to an end.
So far in 2022, this tech ETF has declined by 23%. That provides long-term investors with the potential to capture big gains if the information technology market grows at its projected 10.3% compound annual rate to over $13 trillion by 2026. Among the companies expected to lead that growth are the top two holdings in this ETF: Apple and Microsoft.
3. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM 0.24%) takes a slightly different approach. It provides a diversified portfolio that focuses on companies that have a history of paying high-yielding dividends, including companies in sectors such as healthcare, financials, and consumer staples. Its top 10 holdings include multiple Dividend Kings -- companies that have increased their payouts annually for 50 consecutive years or more -- which should give investors confidence that the ETF will sustain its payouts and produce annual returns in line with its 8% lifetime average. Over just the past 10 years, its average annualized return jumps to 12.6%.
This ETF can produce long-term gains, but it can also provide a steady income stream for investors who choose not to reinvest their dividends. Its total annual dividend payout in 2021 was $3.07 per share. Someone who invests $4,300 annually for 30 years in this ETF would be looking at a total dividend return of $131,000, and annual dividend payouts of $14,000 in retirement.
Of course, those assumptions for how much you'd contribute don't factor in whatever salary increases you get along the way. Boosting your contributions in line with your rising income would further enhance your results over the years, and improve your odds of having a million-dollar-plus portfolio by the time you reach retirement.
