When we talk about retirement savings, we often see the millionaire goal tossed around. And while everybody is different, it's fair to say that a couple of million dollars will do a good job of helping you cover your expenses and leave you with enough money left over to enjoy your senior years to the fullest.
Now you'll often hear that to retire a millionaire, it's important to do a few key things:
- Start early
- Save consistently
- Invest wisely
And it's that last point that could really make a huge difference with regard to your ending savings balance.
A smart way to invest for retirement
Investing your retirement nest egg in stocks is a smart way to generate solid returns that allows your savings to grow at a respectable pace. But choosing stocks can be tricky, and some savings plans -- namely 401(k)s -- don't even allow you to buy individual stocks. But worry not -- you don't need to handpick stocks for your retirement portfolio when you can simply fall back on S&P 500 index funds instead.
An index fund is a fund that tracks a specific market index, so naturally the S&P 500 index funds track the S&P 500 index. Why choose that index? Well, as the name implies, it consists of the 500 largest publicly traded companies out there, which means you're putting your money in numerous large players with strong performance histories. It also means you're getting instant diversification -- after all, you're effectively investing in 500 different stocks, even though you're only buying shares of a single fund or a handful of funds.
Now, let's get back to that millionaire goal. Over the past 30 years, the S&P 500 has seen a wide range of returns. In 2019, it clocked in an impressive 31.49% return. In 2008, on the other end, it was down 37%. But all told, over the past three decades, the S&P 500 has delivered an average annual return of over 12%. So if you put the bulk of your retirement savings into one of these funds, you'll give yourself a solid opportunity to grow a lot of wealth.
In fact, let's run some numbers to see what sort of wealth we're talking about. If you put $400 a month into a retirement plan invested heavily in S&P 500 index funds over a 40-year time frame, there's a good chance you'll score an average annual 10% return. Why 10%? Well, as just mentioned, the S&P 500's average is a bit higher, but you may not put your entire nest egg into S&P 500 index funds, and also, as retirement nears, you may (and should) shift a larger chunk of your portfolio to more conservative investments.
But if we go with that 10%, based on a $400 monthly investment over 40 years, you'll end up with a nest egg worth $2.124 million. Make it $500 a month, and your total climbs to $2.655 million.
Remember, the S&P 500 may have its ups and downs over time, but overall, it has a strong history of performing well, so there's no reason to think it won't continue to do so. If you want an easy, hands-off way to generate serious wealth for your senior years, look at investing your retirement savings in S&P 500 index funds -- and get ready to enjoy the retirement of your dreams.