Investing for retirement is crucial, especially if you want to achieve millionaire status before leaving the workforce. In fact, there are two critical factors that determine if you can save a seven-figure nest egg: How much you invest, and what you put your money into.
If you want to end up with a nest egg of at least $1 million, you’ll need to put aside a reasonable amount of money each month and make smart investments. You may be able to do this by picking individual stocks and holding them for the long term — if you’re willing to put in the time to research companies and develop an investment strategy.
But there’s also an easy approach for those who don’t have the know-how or interest in stock selection. You can invest in an ETF and easily hit your $1 million target, especially if you start early.
This ETF could be your ticket to millionaire status as a retiree
ETFs, or exchange-traded funds, trade like stocks but provide exposure to many different investments, so they reduce your risk. There are many different ETFs available to invest in, but one of the simplest approaches to becoming a millionaire is to select one that tracks the S&P 500.
The S&P 500 is a financial index made up of the 500 largest U.S. companies. When you buy an S&P fund, you own a very small stake in many trusted American businesses. And because S&P ETFs are passively managed, with investments designed to mirror the composition of the S&P, the fees are fairly low.
There are several great S&P funds, including the Vanguard S&P 500 ETF (NYSEMKT:VOO). This ETF has earned a 13.9% average annualized return over the past three decades. And it has an expense ratio of just 0.03% so you’ll pay very few fees to invest in it.
Now, you aren’t going to beat the market or consistently earn returns over time that are much better than the historical average if you invest in this ETF. But your risk of big losses is small. In fact, if you consistently invest in Vanguard’s S&P 500 ETF over a long enough period, millionaire status is almost a sure thing.
The key, however, is that you need to figure out how much to invest to become a millionaire retiree. And that depends on the age when you start saving. The table below shows how much you must contribute to this ETF each month to end up with a $1 million nest egg based on the amount of time you have left to become a millionaire. It’s based on a 13% average annual return, just in case your investment underperforms historic averages a bit and because you do have a small fee to pay.
|Years to Retirement||Amount You’ll Need to Invest Each Month|
Obviously, if you have a longer timeline, it’s much more doable to become a millionaire with an investment in Vanguard’s S&P Index fund. But even those with just a few years left should still be able to build a reasonable nest egg with minimal risk if they invest as much as they can spare in this ETF.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.