Is the S&P 500 All You Need to Retire a Millionaire?

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Investing steadily in an S&P 500 index fund is one of the simplest and most effective ways to accumulate wealth. Starting early and consistently putting money into a low-fee broad-market index fund can put you on course to own a $1 million portfolio one day.

But when you’re investing for retirement, you should also diversify your portfolio across asset classes in order to ensure your money is there when you need it.

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A great wealth accumulation tool

Since the end of World War II, the S&P 500 has averaged an inflation-adjusted total return of 7% per year. If you simply want to accumulate a nest egg of $1 million, investing every month in an S&P 500 index fund and reinvesting any dividends can certainly get you there. How much that needs to be each month depends on how much time you have.

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The table below shows you how much you would need to save every month at a 7% rate of return in order to reach $1 million on various timelines.

Years Savings per month
10 $5,777.51
15 $3,154.95
20 $1,919.66
25 $1,234.46
30 $819.69
35 $555.23
40 $380.98
45 $263.67

Table source: Calculations by author.

As you can see, the longer your timeline, the less you have to save per month. However, it’s necessary to recognize that an S&P 500 index fund isn’t going to deliver those average returns in a steady, straight-line fashion. The market is guaranteed to experience lots of ups and downs along the way. In some years, it may surge by 20%. In others, it could fall by 10%.

The sequence of those returns matters a lot. If you get a lot of years with 20% returns early on in your investing life, you’ll have less money in stocks to benefit. If there are a lot of good years near the end, your savings plan will likely result in you ending with much more than $1 million. So while you can use the above table as a rough guideline, expect your actual results to vary.

The best strategy is to invest as much as is reasonable for you. Trust the process and you should reach the $1 million milestone eventually.

Why you need more than an S&P 500 index fund to retire

If you plan to accumulate wealth indefinitely with no designs on ever using the money, your simplest path forward would be to invest 100% of that money in an S&P 500 index fund. But if you plan to retire and actually use that money to live on, you should consider wealth preservation goals as well as your accumulation goals. Balancing those two requires building a more complex, diversified portfolio.

Such a portfolio will include assets with negative price correlations. That’s a fancy way of saying that when one asset class declines in value, the other tends to increase.

For about 30 years, U.S. Treasury bonds offered an excellent diversifier for domestic stocks. During periods when investors’ money flowed out of stocks (riskier assets), it typically flowed into bonds (safer assets).

During the first half of 2022, both of those asset classes experienced significant declines in value, calling into question their negative price correlation relationship. It’s unclear how much that relationship has been impacted by the Fed’s decisions to raise interest rates to curb inflation, or the degree to which it may actually have broken down.

For now, though, it’s simplest to stick with bonds merely as a diversifier to your equities. As you approach retirement, you ought to shift more of your portfolio to bonds. That will help preserve the capital you worked so hard to accumulate if the market enters a declining period.

Bonds will continue to play a crucial role in your retirement portfolio, but you shouldn’t discount the impact of other sources of income like Social Security or real estate in your overall asset allocation.

So, can you retire with just an S&P 500 index fund? Not quite. But using one to help you reach your goals is still a great idea.

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