Investing a large lump sum in the stock market doesn't have to be a risky move. If you put the money into a well-diversified exchange-traded fund (ETF) that gives you exposure to hundreds of stocks, it can be a solid investment to hang on to.
A popular option for many investors and that advisors often recommend is to simply track the S&P 500. The broad index tracks the leading companies and historically, it has averaged an annual return of 10%. While there may be occasional bad years along the way, a simple buy-and-hold strategy has been an effective way for many people to grow their wealth.
An ETF that tracks the index and which has minimal fees is the Vanguard S&P 500 ETF (VOO 0.63%). Could putting $50,000 into the ETF get you to $1 million by the time you retire? Let's take a look at how probable of a scenario that is.
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Is a $50,000 investment enough to enable you to retire with $1 million?
Investing $50,000 into the stock market is a lot of money. But for it to eventually grow to $1 million is no easy task; it would mean that it expands to at least 20 times its original value. That's a significant return, and a lot will depend on the number of investing years you have to go until you retire.
If, for example, you have just 10 years to go, then you would need to average an annual return of approximately 35% -- far higher than the S&P 500 average of 10%. But if you have 40 years to go, then you would need an average return of less than 8%, which suddenly seems far more probable.
This is why the answer to this type of question isn't necessarily a straightforward one. And that's why I've created the table below, to show you what a $50,000 investment might grow to in the Vanguard S&P 500 ETF, based on not only varying years until retirement (assuming you retire at the age of 65) but also different growth rates.
| Age | Years to Retire | 9% Growth | 10% Growth | 11% Growth |
|---|---|---|---|---|
| 55 | 10 | $118,368 | $129,687 | $141,971 |
| 50 | 15 | $182,124 | $208,862 | $239,229 |
| 45 | 20 | $280,221 | $336,375 | $403,116 |
| 40 | 25 | $431,154 | $541,735 | $679,273 |
| 35 | 30 | $663,384 | $872,470 | $1,144,615 |
| 30 | 35 | $1,020,698 | $1,405,122 | $1,928,743 |
| 25 | 40 | $1,570,471 | $2,262,963 | $3,250,043 |
Source: Calculations by author.
Even if the ETF ends up averaging a slightly lower growth rate in the long run, you can still end up with an investment worth $1 million -- but it'll take 35 years to get there. And even if it ends up averaging 11%, you'll still likely need 30 or so investing years.
What can you do to enhance your returns?
In an ideal world, you can achieve a better growth rate to get you to $1 million quicker. But that's the temptation that can lure many investors into taking on risky investments. While there is greater potential for larger and quicker gains from chasing high-risk investments such as meme stocks, there's also a greater probability that you lose money along the way.
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Key Data Points
Investing in the Vanguard S&P 500 ETF offers a good mix of growth and safety, which is why it can be the best option for the long term, especially with its minimal expense ratio of just 0.03%. The best way to enhance your gains is simply by investing more money into the fund. It doesn't have to be a large lump sum but you can add to your position as you're able to save more money. That larger your investment is, the greater the effect of compounding becomes.
When it comes to growing your wealth and saving for retirement, it's crucial to consider not only growth, but safety as well. That's why the Vanguard S&P 500 ETF and its low fees can be an ideal option to hold in your portfolio and invest regularly into.
