How an index fund can take you to millionaire lands | personal finance

(Stefon Walters)

Hitting the $1 million mark is a lifetime goal for many people, and honestly, as time goes on, it’s becoming more of a necessity for many people to have at least that much saved for retirement. Fortunately, achieving $1 million is a little easier than some may imagine; all it takes is consistency, time, and an index fund.

iShares Core S&P 500 ETF

The S&P 500 is an index that tracks the 500 largest publicly traded US companies. Although the S&P 500 is an index, different financial companies have created their own S&P 500 funds that buy the shares of the index. An S&P 500 index fund that can take you to millionaire lands is the iShares Core S&P 500 ETF (NYSEMKT: IVV). It’s one of the lowest-cost index funds around, and based on historical returns, it can do a lot of the heavy lifting for you.

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The fund owns shares of all constituents of the S&P 500, with the top 10 holdings accounting for 29.39% of the fund. One of the key benefits of investing in the fund is the instant diversification you receive. It has companies in practically any sector you can imagine. The top five industries represented are:

  • Information technology (27.96%).
  • Health (13.58%).
  • Discretionary consumption (11.99%).
  • Finance (11.08%).
  • Communication (9.34%).

With a single fund, you achieve one of the key pillars of investing (diversification), while also investing in large-cap companies that are financially strong.

Let compounding do the work for you

Getting to $1 million by strictly saving is next to impossible for most people. The real key to making $1 million is letting time and compounding do most of the work for you. Historically, the S&P 500 has returned around 10% per year over the long term. Of course, some years it will be less and other years it will be more, but generally speaking, 10% is a good benchmark to use.

Assuming the iShares Core S&P 500 ETF will return 10% per year, here’s what it would have accumulated over 30 years with different monthly contributions (representing the fund’s 0.03% expense ratio):

Monthly Contributions Annual return (including fees) Account value after 30 years
$500 9.97% $981,000
$600 9.97% $1.17 million
$750 9.97% $1.47 million
$1,000 9.97% $1.96 million

In this scenario, $500 per month, which is equal to the IRA’s annual contribution limit of $6,000 for people under 50, is almost enough to reach $1 million over 30 years. Even increasing monthly contributions to $600 would equate to more than $1.17 million over 30 years. More than anything, this shows the power of time and how its compounding effect can account for the lion’s share of your investment returns. At $600 per month, you would have personally invested $216,000 in the fund over 30 years, but your total would be $900,000 more than that.

Making sure you are financially comfortable in retirement is all about consistency and discipline. In the short term, results may seem minimal, and market downturns can make you second-guess your investment options, but trusting in the power of the S&P 500 and sticking to your plan is sure to produce exponential results in the long run. to run.

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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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