The S&P 500 (^GSPC 1.02%) has always moved higher over long periods of time, and the index has consistently outperformed investment-grade bonds, real estate, and gold. That makes an S&P 500 index fund a very compelling investment option when saving for retirement.
Famed investor Warren Buffett himself recommends that strategy. An S&P 500 index fund is essentially a basket of U.S. stocks, and Buffett believes that basket is "virtually certain to be worth far more in the years ahead."
The Vanguard S&P 500 ETF (VOO 1.00%) in particular could turn $450 per month into $939,100 over three decades. That portfolio could then generate $17,100 in annual dividend income in retirement. Here's how.
The Vanguard S&P 500 ETF spreads capital across many influential stocks
The Vanguard S&P 500 ETF tracks the performance of 500 large U.S. companies, ranging from value stocks to growth stocks across all 11 market sectors. The index fund offers easy exposure to many of the most influential businesses in the world. The top 10 holdings in the Vanguard S&P 500 ETF (as of Jan. 18, 2024) are detailed below:
- Apple: 7%
- Microsoft: 7%
- Alphabet: 3.8%
- Amazon: 3.4%
- Nvidia: 3.1%
- Meta Platforms: 2%
- Tesla: 1.7%
- Berkshire Hathaway: 1.6%
- JPMorgan Chase: 1.2%
- Broadcom: 1.2%
The Vanguard S&P 500 ETF offers broad diversification at a very low price. Its expense ratio of 0.03%, well below the average of 0.37%, means investors would pay just $0.30 per year on every $1,000 invested.
The index fund also offers a certain degree of safety. The S&P 500 has been a profitable investment over every 20-year period since it was created in 1957. That means investors are virtually guaranteed to make money over the next two decades, provided they stay invested the whole time.
How $450 invested monthly could grow into $939,100, and create $17,100 in annual dividend income
The S&P 500 returned 1,680% over the last 30 years, compounding at 10.06% annually. At that pace, $450 invested monthly in the Vanguard S&P 500 ETF would grow into $90,200 in one decade, $325,500 in two decades, and $939,100 in three decades. Those numbers assume all dividends are reinvested.
At that point, after building a $939,100 portfolio over a 30-year time period, investors could stop reinvesting their dividends to earn passive income in retirement. The S&P 500 paid an average dividend yield of 1.83% over the last decade. At that rate, a $939,100 portfolio invested in an S&P 500 index fund would produce about $17,100 in annual dividend income.
That annual payout would also increase over time if you left the principal invested. Here's how: Without reinvested dividends, the S&P 500 returned 7.98% annually over the last three decades. At that pace, $939,100 invested in an S&P 500 index fund would be worth more than $1.3 million in another five years (i.e., 35 years since inception). That new total would produce $25,200 in annual dividend income, assuming a dividend yield of 1.83%.
The Vanguard S&P 500 ETF is a good option for virtually any investor
Index funds may not be exciting, but the S&P 500 has been a consistent moneymaker for patient investors. Better yet, it returned 10.06% annually over the last 30 years. Investors would be hard-pressed to find a better risk-reward ratio in a retirement savings vehicle. That's why Warren Buffett has pounded the table on S&P 500 index funds for more than a decade.
As a final note, investors don't have to choose between individual stocks and an S&P 500 index fund. I personally have my portfolio split between growth stocks and the Vanguard S&P 500 ETF. If my stocks outperform, then my portfolio will outperform and I get to take more vacations. But if my stocks underperform, I know my portfolio will be OK because the S&P 500 has been a profitable long-term investment throughout history.
