How 1 Index Fund Can Lead You To Millionaire Land | Smart Change: Personal Finance

(Stefon Walters)

Reaching the $1 million mark is a lifelong goal for many people, and frankly, as time goes on, it becomes more and more necessary for many people to have at least that much saved up for retirement. Fortunately, reaching $1 million is a little easier than some might imagine; all it takes is consistency, time and one index fund.

iShares Core S&P 500 ETF

The S&P 500 is an index that tracks the 500 largest publicly traded American companies. Although the S&P 500 is an index, several financial companies compose their own S&P 500 funds that buy the stocks in the index. An S&P 500 Index Fund That Can Take You To Millionaire Land Is It iShares Core S&P 500 ETF (NYSEMKT: IVV)† It is one of the cheaper index funds and based on historical returns it can do a lot of the heavy lifting for you.

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The fund owns stocks from all components of the S&P 500, with the top 10 holdings making up 29.39% of the fund. One of the main benefits of investing in the fund is the instant diversification you receive. It has companies in just about every industry you can think of. The top five sectors represented are:

  • Information technology (27.96%).
  • Healthcare (13.58%).
  • cyclical consumer (11.99%).
  • Financials (11.08%).
  • Communication (9.34%).

With just one fund, you achieve one of the most important pillars of investing (diversification), while also investing in large-cap companies that are financially sound.

Let compounding do the work for you

Reaching $1 million through strict savings is nearly impossible for most people. The real key to hitting $1 million is to let time and compounding do most of the work for you. Historically, the S&P 500 has risen around 10% annually over the long term. Sure, some years it will be less, and other years it will be more, but in general 10% is a good measure to use.

Assuming the iShares Core S&P 500 ETF will return 10% annually, this is how much you would have accumulated over 30 years at various monthly contributions (taking into account the fund’s 0.03% expense ratio):

Monthly Contributions Annual return (including costs) 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 a month — which is equivalent to the $6,000 annual IRA contribution limit for those under 50 — is almost enough to reach $1 million in 30 years. Even increasing monthly contributions to $600 would equate to more than $1.17 million in 30 years. Above all, this shows the power of time and how its compounding effect can make up the bulk of your investment gains. At $600 per month, you would have personally invested $216,000 in the fund in 30 years, but your total would be $900,000 more than that amount.

Making sure you are financially comfortable in retirement is all about consistency and discipline. In the short term, results may seem minimal, and a downturn in the market may leave you questioning your investment choices, but if you have faith in the strength of the S&P 500 and stick to your plan, it will in the long run. yield exponential results. walk.

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

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