Can I retire on index funds?
Index fund investing might not seem as exciting as buying individual stocks, but that doesn't mean they can't build wealth effectively. It is possible (even likely) to build a million-dollar retirement nest egg using nothing but index funds.
You 'should' invest in index funds for retirement, NOW, because retirement is decades away. Investing early gives you time for the magic of compound interest to happen. If you invest $10,000 today, and it earns the market average return of 10%, give it 30 years to grow, it will be $174,500.
Broadly diversified index funds can be your investment vehicle for a ride to becoming a millionaire retiree, if the stock market performs as it has in the past. If you know little about investing and have no desire to learn more, you still can be a successful investor. That's because you have the power of index funds.
Having a large percentage of your retirement portfolio in an S&P 500 index fund is a good strategy, given your financial circ*mstances.
The primary con of index funds when in comparison to 401(k) plans is the lack of any tax advantage. Fund purchases are made with after-tax dollars and investors pay taxes on any gains in their holdings, just like normal stock investments. There is also a lack of flexibility in index funds.
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).
While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
It's easy to see why S&P 500 index funds are so popular with the billionaire investor class. The S&P 500 has a long history of delivering strong returns, averaging 9% annually over 150 years. In other words, it's hard to find an investment with a better track record than the U.S. stock market.
In order to hit your goal of $1 million in 10 years, SmartAsset's savings calculator estimates that you would need to save around $7,900 per month. This is if you're just putting your money into a high-yield savings account with an average annual percentage yield (APY) of 1.10%.
Can you live off the S&P 500?
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
Index funds often perform better than actively managed funds over the long-term. Index funds are less expensive than actively managed funds. Index funds typically carry less risk than individual stocks.
| Symbol Symbol | ETF Name ETF Name | % In Top 10 % In Top 10 |
|---|---|---|
| VUG | Vanguard Growth ETF | 56.26% |
| IWF | iShares Russell 1000 Growth ETF | 53.19% |
| VGT | Vanguard Information Technology ETF | 60.14% |
| XLK | Technology Select Sector SPDR Fund | 66.49% |
Exchange-traded funds (ETFs) and index funds are similar in many ways but ETFs are considered to be more convenient to enter or exit. They can be traded more easily than index funds and traditional mutual funds, similar to how common stocks are traded on a stock exchange.
While there are few certainties in the financial world, there's virtually no chance that an index fund will ever lose all of its value. One reason for this is that most index funds are highly diversified. They buy and hold identical weights of each stock in an index, such as the S&P 500.
In 2002, the fallout from frenzied investments in internet technology companies and the subsequent implosion of the dot-com bubble caused the S&P 500 to drop 23.4%. And in 2008, the collapse of the U.S. housing market and the subsequent global financial crisis caused the S&P 500 to fall 38.5%.
The important thing to remember about index funds is that they should be long-term holds. This means that a short-term recession should not affect your investments.
Another reason some investors don't invest in index funds is that they may have a preference for investing in a particular industry or sector. Index funds are designed to provide exposure to broad market indices, which may not align with an investor's specific interests or values.
Are index funds 100% safe?
Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus hold a lower risk than individual stock holdings. Market indexes tend to have a good track record, too.
Lack of Global Diversification
The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.
- Make Every Dollar Count — and Count Every Dollar. ...
- Pick Your Next Location With Savings in Mind. ...
- Or, Stay Where You Are and Trade Your Equity for Income. ...
- Get the Most Out of Healthcare Savings Programs. ...
- Delay Retirement — and Social Security.
Key takeaways: Most people in the U.S. retire with less than $1 million. $500,000 is a healthy nest egg to supplement Social Security and other income sources. Assuming a 4% withdrawal rate, $500,000 could provide $20,000/year of inflation-adjusted income.
What is the average and median retirement savings? The average retirement savings for all families is $333,940 according to the 2022 Survey of Consumer Finances.
