When you’re planning for retirement, you can’t count on Social Security to be your primary source of income. These benefits are simply too small to live on, because they replace just about 40% of pre-retirement income, when most experts project you’ll need 80% or more.
For most people, the rest of their money will need to come from investments.
The good news is, there’s one investment out there that could help future retirees go a long way toward having the money they need for their later years, assuming they start investing in it early enough.
This investment could be the ticket to financial security as a retiree
If you want a safe investment that’s all but certain to provide more than $32,000 in annual income, an S&P fund many be just the thing.
The S&P 500 is a financial index made up of shares of around 500 of the largest U.S. companies. It has consistently produced around 10% average annual returns. If you put $5,000 into an S&P fund each year for 30 years, your nest egg would be worth more than $822,000 by the time you hit retirement age (assuming your returns are similar to historical averages, which there’s every reason to believe will be the case).
If you follow the 4% rule (which says you can withdraw 4% of your retirement account balance during your first year of retirement and then adjust upward for inflation), your savings would provide you with an annual income of around $32,900.
When combined with the average Social Security benefit, you’d have well over $50,000 to live on in your later years. For many retirees, this will be more than enough to replace the requisite 80% of the income they were earning before leaving the workforce.
Of course, if you need a lot more than $32,000 from your retirement investments, the S&P 500 can also help with that. You’ll just need to invest more into it each year, or start investing earlier.
And if you don’t have 30 years until retirement to invest, you could still amass a nest egg offering more than $32,000 of annual income by putting your money into an S&P index fund. But hitting that income target would require a larger monthly investment.
Should you invest in an S&P index fund?
Investing in an S&P fund is a low-risk strategy to build a retirement nest egg because of its consistent performance over a very long time period. You’re investing in a diverse array of the largest U.S. companies, so it’s about as safe an investment as you can get.
The downside, of course, is that you aren’t going to be able to earn eye-popping returns that could really accelerate the growth of your nest egg. In fact, you can’t really beat the market with an S&P index fund, since the S&P is what most people refer to when discussing how the market performs.
If you have the time and knowledge to invest some of your retirement money in individual stocks, it’s possible you could earn much better returns. But if you don’t pick your investments wisely, your portfolio could also perform much worse.
You’ll need to consider your risk tolerance, your investment knowledge, the amount you can invest, and your timeline for leaving the workforce when deciding what approach is right for you.
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