Targeting millionaire status by your 65th birthday?
Depending on how old you are today, the S&P 500 may be all you need to get
there.
The S&P 500 is a basket of the U.S.'s largest public
companies. Those 500-plus organizations collectively account for about 80% of
the stock market's total value. As such, they drive much of the performance for
the market as a whole. That's why when someone says, "The market was up 5%
today," it often means specifically that the S&P 500 went up 5%.
Now let's get back to that millionaire goal of yours. The
S&P 500 has three characteristics that make it a suitable anchor for your
retirement portfolio. To start with, it's diversified. Holding hundreds of
different stocks spreads out your risk so that you're not dependent on any one
of them.
Financial strength, proven business models
Second, the companies in the S&P 500 have financial
strength, proven business models, experienced leaders, and loyal customers. If
you use products or services from Apple, Amazon, Visa, or American Express
regularly, you are one of those loyal customers.
These are the qualities you want in your retirement
portfolio. That account could be with you for 60 years or more, so you need
companies you can safely hold for long periods of time.
Strong long-term growth
The third characteristic, though, is the kicker. The
long-term average annual growth rate of the S&P 500 is about 7% after
inflation. At that rate, you can reach millionaire status in 30 years by
investing about $880 a month, including your employer match. If you're earning
the median U.S. salary of $53,508 for workers over 24, you could cover that
monthly contribution with a 15% paycheck deferral and 5% employer match.
That might sound like a stretch right now, but here's some
perspective. To reach the million-dollar mark in a high-yield cash savings
account earning 0.55%, you'd have to contribute $2,500 monthly for 30 years.
That's really only an option for someone who makes six figures and also has low
living expenses.
You can also still ride the S&P 500 to millionaire
status even if your retirement timeline is shorter than 30 years. It will take
higher monthly contributions, but you can use a few tricks to make it easier.
First, streamline your household spending and use the savings to increase your
contributions. Second, invest in a tax-advantaged account, such as a 401(k) or
HSA with employer match. Third, make sure you are reinvesting any dividends.
And finally, increase your contributions every time you get a raise or cash
windfall.
Managing the volatility
Before you invest your last dollar in the S&P 500, know
that the index can be volatile in shorter periods of time. Volatility doesn't
actually cost you anything, unless you have to sell your stocks when the share
prices are down. You can mitigate that risk in two ways. One, keep an emergency
account with enough cash in it to cover at least three months of your living
expenses. And two, don't invest money you might need in the next five years.
How to invest in the S&P 500
You can invest directly in the S&P 500 by individually
purchasing all 500-plus index constituents. But the easier route is to buy a
low-cost S&P 500 ETF instead. You will incur fund expenses this way, but
it's vastly more efficient to manage one position versus hundreds. Plus, if you
choose the right fund, those expenses will be less than 0.05% of your invested
capital.
You may be wondering what gives with the average returns in
excess of 13%. Over the past 10 years, the S&P 500 has actually grown by
13.43% annually, which is well above its long-term average. While that growth trend
is fantastic, it's not realistic to assume it will continue indefinitely.
You're better off planning more conservatively, and then celebrating if your
retirement account outperforms the plan.
Ride the market
Investing in the S&P 500 can make you a millionaire
retiree. That holds true even if you're stretching today to contribute a few
hundred dollars a month. What's important now is to get moving in the
millionaire direction. You can always find ways to increase your contribution
over time.
And who knows? The market might continue its unusually
strong performance. If it does, you'll want to be there to reap the benefits.
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