Working can often be stressful enough by itself; saving and investing shouldn't be as well. With countless investments available and no shortage of investing advice, it can be easy to feel overwhelmed about investing for retirement.
That doesn't have to be the case, though. Simplifying your retirement investing strategy can bring you invaluable peace of mind. It doesn't take complex strategies or huge amounts of money to achieve a million-dollar retirement -- you just need one exchange-traded fund (ETF): the Vanguard S&P 500 ETF (VOO -0.29%).
One investment, many boxes checked off
The Vanguard S&P 500 ETF is an investing trifecta: low cost, diversification, and proven results. Its 0.03% expense ratio ($3 per $10,000 invested) is one of the lowest you'll see with an ETF, which shouldn't be taken for granted. Regardless of how small they appear on paper, even fractions of a percent in expense ratios can add up to thousands of dollars over an investing career.
The instant diversification you receive with the Vanguard S&P 500 ETF checks off one of the key pillars of investing. Since it only contains large-cap companies, it's not fully diversified, but it's as close to a one-stop shop as you'll need for your retirement stock portfolio.
The ETF contains companies from all 11 major sectors:
- Communication services (7.7%)
- Consumer discretionary (10.7%)
- Consumer staples (6.7%)
- Energy (4.8%)
- Financials (11.7%)
- Healthcare (14.3%)
- Industrials (8.5%)
- Information technology (27.3%)
- Materials (2.8%)
- Real estate (2.7%)
- Utilities (2.8%)
Sectors and industries endure swings and cycles, just like individual companies. You don't want to find yourself in a situation where your portfolio's success (or lack thereof) depends on one or too few sectors. An investment in the Vanguard S&P 500 ETF is essentially an investment in the broader U.S. economy.
Time and consistency matter a lot
Since its September 2010 inception, the Vanguard S&P 500 ETF has averaged a 13.3% annual total return, while the S&P 500 itself has averaged around 10% annual returns since its inception in 1926. Years vary widely, but 10% has become the annual benchmark people use when referencing the S&P 500.
Here's approximately how long it would take you to cross the $1 million mark at different monthly investments and 10% average annual returns:
| Monthly Investments | Approximate Years Until $1 Million |
|---|---|
| $500 | 31 |
| $1,000 | 24 |
| $1,500 | 20 |
| $2,000 | 18 |
| $2,500 | 16 |
Calculations by author.
Thanks to compound earnings, $1 million becomes much more achievable with time on your side. In the 24 years it took to make $1 million by investing $1,000 monthly, you would have only personally paid $288,000 over that span. The more time you give yourself, the larger the gap between your personal investments and total value can become.
The S&P 500 isn't guaranteed to continue averaging 10% annual returns over the long run, but there hasn't been anything to warrant questioning its ability to keep growing at similar rates, in my opinion.
Use a Roth IRA if you're eligible
A Roth IRA is an individual retirement account that allows you to contribute after-tax money, invest it, and then take tax-free withdrawals in retirement. A major difference between a Roth IRA and a 401(k) is the investment options. With a 401(k), your plan provider gives you with options you must choose from. A Roth IRA operates like a brokerage account in that you can invest in any stock or ETF you want (Some employers also offer Roth 401(k)s with the same tax rules, but also limited investment options similar to standard 401(k)s.)
Because Roth IRAs are similar to brokerage accounts, it makes sense to invest in these first to take advantage of the tax break before investing in a brokerage account.
In our example, someone investing $500 monthly hit $1 million in 31 years after personally contributing $186,000. In a regular brokerage account, the roughly $905,000 in capital gains would be taxed. For most people, this means a tax bill of no less than $135,750 (15% capital gains tax rate). Making those same investments in a Roth IRA would mean the full $1 million would be tax-free in retirement.
There is an income limit for Roth IRAs -- $138,000 if single and $218,000 if married and filing jointly in 2023 -- so take advantage if you're under the ceiling. The tax savings are unbeatable.
