Can you retire as a millionaire by investing solely in index funds? I won't bury the lede: The answer to this question is undoubtedly, resoundingly, yes.
The “why” and “how” of index fund investing are equally important factors in becoming a millionaire. Let's explore how this can happen for you, no matter your beginning financial circumstances.
The premise behind index funds
Index funds are investment vehicles that seek to mimic the performance a particular index, like the S&P 500 index. If you own an S&P 500 index fund, and the S&P 500 index returns 8% in one year, you will also earn that same 8% (less any fund expenses, which are now 0% or close to it). Remember that market indexes do not return the same every year, and many years have brought negative returns.
Earning this 8% requires no active management on your part, which makes index funds incredibly efficient for everyday investors. This means that you do not need to spend time or effort picking and trading stocks, figuring out which ones will go up and which will go down. Simply put, you can invest your money and effectively forget about it — and you'll still earn the market return.
A roadmap to millionaire status
This sounds easy enough on paper, but make sure you're also checking the big boxes to accelerate your road to a seven-figure account. Check out the more important ones in this section.
Start as soon as possible
If you're going to get one of these right, make it this one: The sooner you start, the sooner your money will begin to compound aggressively. Money grows at a faster rate when it has a larger base, and the longer it has to grow, the more you will benefit from the subtle beauty of compound interest.
Save at regular intervals
Regardless of where the market is trading right now, even at its all-time highs, it's important to keep investing. Pick any interval (i.e., every week, every two weeks) and commit to investing on a schedule. This ensures you continuously add to your portfolio and at the same time will accelerate compounding.
Pick an index fund and stick with it
Following the above example, say you agree that an S&P 500 index fund works for you. You can simply choose an S&P 500 index fund from any of the discount brokerages (Fidelity, Charles Schwab, or Vanguard) and plan to hold it for the long term. After a year passes, you will also pay a reduced tax rate on any built-up gains.
There will be a temptation to sell if the market falters, as it most recently did in March 2020. Part of successful investing is to stay the course even in the most difficult market environments. That's much easier said than done, but it's also a necessary feature of index investing.
Refuse to pay high fees
Index fund investing is now entirely free, as evidenced by the Fidelity Total Market Index Fund (NASDAQMUTFUND: FZROX). The fund follows the entire stock market and costs literally nothing. Since you don't need to continuously manage the fund, you certainly don't need to pay someone else to manage it for you. Paying unnecessary fees is one way to derail your retirement and could add years to your working life.
By the numbers
|Starting Amount||Savings||Frequency||Time to Retirement||Market Return||Ending Account Balance|
From the above chart, you'll notice that you end up a millionaire in every case, but in each instance, you pull different “levers” to get there:
- You can start very early and invest $150 a month. This would mean starting in your teens and simply investing the same amount in an index fund for the entirety of your working career.
- You can invest early but with greater frequency. Even $50 a week starting in your 20s would get you to millionaire levels by full retirement age.
- You can invest more but start later. Even with $0 starting at age 30, $100 a week is enough to make you a millionaire by the time you're 65.
Start your journey to $1 million today
There is an infinite number of ways to arrive at $1 million through index fund investing, but the best way to do it is by investing as much as you can, as soon as possible, and having the nerve to leave it alone as the market fluctuates. Remember: Get the big ideas right, and let the market do the rest of the work.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Sam Swenson, CFA, CPA owns shares of Fidelity Total Market Index Fund. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.