Many Americans have specific financial goals they’re trying to achieve, and one of them is having enough money in a brokerage account to supplement their Social Security benefits when they retire.
The specific amount you want to save may be different than what other people want to save, but if your goal is to have $500,000 saved by retirement, there’s one simple strategy to help you get there.
Here’s how to do it and how long it will take:
Let time and compound interest take their toll.
Saving $500,000 is an ambitious financial goal, but two elements make it much easier to achieve: time and compound interest earnings.
First, compound interest works in your favor by allowing the money you invest to earn interest, and the money you earn on interest to earn more money. For example, if you start with $10,000 and your investments earn a historical annual rate of return of about 10%, after 10 years you’ll have $25,937.
You will get much more than that Doubling If you just leave it there, you will lose money in 10 years!
This leads to the next point: the longer you invest your money, the greater its return potential. $10,000 can become $108,347 after 25 years. More than 10 times the initial investment!
How much do you need to invest to reach $500,000?
Now that we’ve seen how compound interest works and how it can grow your money over time, let’s look at some scenarios to help you reach $500,000 or more.
|
Initial Investment |
Investment years |
Annual Return |
Monthly Donation |
Final amount |
|---|---|---|---|---|
|
$2,500 |
twenty five |
10% |
$405 |
$505,053 |
|
$5,000 |
twenty five |
10% |
$380 |
$502,636 |
|
$7,500 |
twenty five |
10% |
$360 |
$506,119 |
|
$10,000 |
twenty five |
10% |
$340 |
$509,603 |
|
$20,000 |
twenty five |
10% |
$245 |
$505,834 |
Source: Calculations from Investor.gov.
The table shows that the larger the initial investment, the smaller the monthly contributions needed to reach $500,000.
Of course, there’s no guarantee you’ll earn 10% per year for 25 years, but that’s the historical annual return for the S&P 500. Taxes, inflation, and market fluctuations will affect how much you earn over that period.
What to invest in to save $500,000
Investing doesn’t have to be a hobby, and you don’t have to do a lot of investment research to achieve a portfolio worth $500,000. All you need to do is put your money into a low-cost index fund that tracks the S&P 500 and leave it there long enough.
Low-cost index funds are passively managed and therefore inexpensive to maintain. For example, the index fund I invest in has an expense ratio of just 0.03%, meaning the fund charges just $3 in fees for every $10,000 invested.
Funds with low expense ratios mean you can keep more of the money your portfolio makes, and because they track the S&P 500, you won’t have to do any investment research to benefit from the growth. Many retirement accounts, such as individual retirement accounts (IRAs), can be used to purchase index funds.
If you’re worried that index funds aren’t a good way to build wealth, remember what famous billionaire investor Warren Buffett said: “In my opinion, the best bet for most people is to own an S&P 500 index fund.”
Having $500,000 in your portfolio is an admirable goal, and with a little planning and consistent investment over time, you can get there. If you’re still not sure if you’re on the right path to reaching your retirement goals, talk to a financial planner to carefully consider each step.
