A lot of people like to search for the next big home-run stock to help reach their investing goals. In reality, long-term wealth creation is more likely to be successful if it comes from discipline, consistency, and a regular investing pattern.
If you invest regularly in an individual retirement account (IRA) or a workplace retirement plan, such as a 401(k), earn a reasonable rate of return, and give it enough time to compound, a comfortable retirement is well within your reach.
A great way to accomplish this is using an S&P 500 exchange-traded fund, such as the Vanguard S&P 500 ETF (VOO +0.16%). It's broadly diversified among the biggest and best companies in the United States. It's ultra-cheap with an expense ratio of just 0.03%. And it's got a quality factor that is built for long-term investing.
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Key Data Points
The answer to how much you need to save to achieve a comfortable retirement is very individual. It depends on how long you have to invest, how much you need to have to achieve the retirement you want (some will need a lot, others not so much), healthcare needs, supplemental Social Security income, and what your tolerance for risk is.
As a starting example, let's say your goal is to build a $1 million retirement nest egg. General guidelines suggest that if you intend to retire at 67 years old and aim for 10 times your ending annual salary as your savings goal (implying a $100,000 salary at the time of retirement), a retirement account balance of $1 million could get you to the "comfortable" level.
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Your starting age will heavily impact how much you need to save on a monthly basis. If we assume an 8% annual rate of return on your investment (a fair, conservative assumption) and a retirement age of 67, here's how much you'd need to save every month:
- Starting age is 20: $161 per month
- Starting age is 30: $368 per month
- Starting age is 40: $876 per month
- Starting age is 50: $2,316 per month
- Starting age is 60: $8,919 per month
These, of course, are just very general examples. If you want a lavish retirement, be prepared to save even more. If you decide to push your retirement age to 70 instead of 67, you might get away with saving less (plus you might draw a bigger Social Security check if you do that). There are a number of factors that go into just how much you need to save.
The best guideline, however, is to start as early as you can and save as much as you can. That gives you a lot of flexibility down the road should anything change with your situation.
As far as what to invest in to get there, a fund, such as the Vanguard S&P 500 ETF, makes a lot of sense. You don't have to bet on the next big winners or do a lot of research. You're simply buying the U.S. stock market and letting time and compounding do the rest. Essentially, all you're doing is betting that the U.S. economy will keep growing over time. Historically, that's been a winning strategy.
