The money you set aside in a retirement plan shouldn’t just sit in cash. Instead, you should be investing your savings for maximum growth.
The reason? You’ll need it to keep up with inflation.
Just take a look at the way living costs have soared in recent months. Inflation has been rampant this year, so much so that it’s fueled the largest Social Security raise in decades.
That’s not actually a good thing, though, because when living costs spike, seniors often struggle to keep up — even when they get more money from Social Security. If you really want to make sure you maintain your buying power during retirement, you’ll need to come in with a large pile of savings. And the right investment could help you do just that.
Invest in the broad market
You’ll often hear that building a diverse portfolio of stocks is a good way to grow wealth. And that’s definitely solid advice.
But putting together a stock portfolio can be tricky. You’ll need to research different companies, keep tabs on how they’re doing, and then shift investments around as those stocks gain or lose value.
All told, maintaining a diverse portfolio can be a lot of work. But it doesn’t have to be. If you invest your long-term savings in S&P 500 ETFs, you can build yourself a portfolio that’s instantly diverse without having to research dozens of companies and continuously keep track of their performance.
Because the S&P 500 consists of so many large companies, it’s considered a measure of how the stock market on a whole is doing. And so putting your long-term savings into S&P 500 ETFs makes a lot of sense.
How the S&P 500 could make you a millionaire
Since its inception in 1926 through 2018, the S&P 500 has generated an average annual return of 10% to 11%. Now this doesn’t mean that the index has done well every single year. Quite the contrary — it’s had years of losses. But if you invest in the S&P 500 over a lengthy period of time, you might easily see an average yearly 10% or 11% return in your portfolio.
But let’s be a bit more conservative than that. Let’s knock down that average return to 9% and assume you’ll sock away $500 a month in a long-term savings plan over a 35-year period of time. In that case, you’ll end up with roughly $1.3 million by loading up on S&P 500 ETFs. Make it a 40-year savings window instead of 35, and you’re looking at a cool $2 million.
Make your life easier
There’s nothing wrong with building a retirement portfolio that consists of individual stocks. But if the idea of that is too taxing, stick with S&P 500 index funds instead. The Vanguard S&P 500 ETF (NYSEMKT:VOO) is a good place to start because it charges super-low fees that won’t eat away at your returns, but there are many other options to look at that will allow you to benefit from the broad market’s gains.
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.