Is the S&P 500 All You Need to Retire a Millionaire ? What's the formula for amassing $1 million in your retirement fund? Swipe Right to See More..
– The S&P 500 has always grown over the long term. – Rates of return vary over time, but index funds do grow enough to make many people into millionaire retirees. – Investors need to understand the costs that reduce the net returns they'll be able to realize.
Index funds aren't too exciting, but they deliver reliable long-term results. Not everyone will reach millionaire status with the S&P 500, but the index still offers a pathway to a seven-figure nest egg. Keep the following in mind as you plan the investment strategy for your 401(k), IRA, or other retirement account.
The index offers no guarantees -- there are plenty of significant, temporary declines as you can see above. However, history has shown us the S&P 500 rises as the global economy grows long term.
Even during the worst possible stretches, the index was never negative over any 15-year period. Historically, the market's average rate of return is just under 10%.
Growing to $1 million We can use this information to figure out how the S&P 500 can make you a millionaire retiree. If you have $100,000 in your retirement account today, it will take 30 years of 8% compounding annual returns to surpass $1 million.
If you only have 10 years, then you'll need to start with about $465,000 to hit $1 million. The best way to maximize growth is to start saving early and keep doing it systematically. A household that contributes $12,000 per year to a 401(k) will need a little over 25 years of 8% growth to hit $1 million.
Of course, these neat little linear growth models aren't realistic. The market goes through cycles of bull and bear markets. This means $241,000 invested in the S&P 500 in 2002 would have been enough to hit $1 million today, but only $263,000 was necessary if you started a decade later in 2012.
Average returns obviously can vary substantially from period to period, so there's a lot of uncertainty in any sort of forecasting. With all that in mind, we can conclude the S&P 500 can make you a millionaire retiree. Index funds are enough to get many people there -- you just need the right combination of savings and patience.
Outpacing index fund Other strategies can certainly deliver better growth, but they also come with additional risk. Some people have successfully picked stocks and outperformed the market over the long term.
Exchange-traded funds (ETFs) that focus on economic megatrends also have a chance to deliver big returns by capitalizing on the fastest-growing portions of the global economy.
There are many examples of successful long-term active strategies. However, studies repeatedly show that active investors -- both professionals and individuals -- usually fail to outperform the S&P 500.
It's difficult to pick winners, and it's even more difficult to avoid the self-sabotage that can be caused by panic and greed. Make sure you have the knowledge, mindset, and time to dedicate to an active strategy before adopting one.
Don't forget about expense Investing expenses are impossible to avoid, so investors need to understand where costs are incurred. You have to account for them to understand the returns you'll eventually realize.