Retiring a millionaire is a goal many workers share, and it’s a realistic target. The average worker expects to need around $2 million to retire comfortably, according to a 2020 survey from Charles Schwab.
Saving that much money can be daunting, though. It may also seem impossible to become a millionaire someday if you’re earning an average salary.
The good news is that you don’t need to be rich or a stock market whiz to become a millionaire. In fact, all you need is the S&P 500.
How to invest in the S&P 500
The S&P 500 is a stock market index that includes 500 of the largest publicly traded companies in the United States. Most companies in this exclusive club are household names, including Amazon, Apple, Microsoft, and Google’s parent company, Alphabet.
While you can’t invest in the S&P 500 itself, you can invest in funds that closely track it — such as S&P 500 ETFs or index funds. These include the same stocks as the S&P 500 itself, and they’re designed to mirror the index’s performance.
One of the biggest advantages of investing in an S&P 500 ETF or index fund is that you’re less likely to lose money over the long run. The S&P 500 is considered a strong representation of the stock market as a whole, and the market has consistently experienced positive returns over time.
Keep in mind that this doesn’t mean you’ll never experience losses. Like any investment, the S&P 500 is subject to volatility, and there will be some years where the losses outweigh the gains.
However, over time, the S&P 500 has proven that it can recover from even the worst market crashes. So even if you experience losses in the short term, it’s very likely you’ll earn positive returns over the course of a few decades.
Becoming a millionaire
Since its inception in 1957, the S&P 500 has earned an average rate of return of around 10% per year. Again, this doesn’t necessarily mean you’ll earn a 10% return year after year, but over time, the positive and negative returns will likely average out to around 10% annually.
There are two key components to becoming a stock market millionaire: start saving early and invest consistently.
- Start saving early: The more time you have to save, the less you’ll need to save each month to become a millionaire. This is because compound interest helps your money grow faster the longer it’s left untouched. By starting now, compound interest will have a snowball effect on your investments, and your savings will grow exponentially.
- Invest consistently: You don’t necessarily need to invest a lot of money to get rich in the stock market, but you’ll need to invest a few hundred dollars each month. The more consistently you invest, the more your savings will be able to grow.
Exactly how much you’ll need to invest depends on your timeline. Let’s say you have a goal of saving $1 million and you’re earning a 10% average annual rate of return on your investments. Here’s approximately how much you’d need to invest each month, depending on how many years you have left to save:
The more time you have to save, the better. But if you’re off to a late start, that doesn’t necessarily mean your goal is out of reach. Regardless of how much you can afford to invest or how many years you have to save, it’s much better to start investing now rather than putting it off.
Once you do start investing in the S&P 500, all you need to do is sit back and watch your money grow. These funds are hands-off investments, meaning they perform best when they’re left alone for as long as possible. In other words, with S&P 500 funds, you can potentially retire a millionaire with next to no effort.
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Source: The Motley Fool