The money you have in your IRA or 401(k) plan shouldn’t just sit there in cash. The reason? You’ll need to grow your savings at a rate that outpaces inflation if you want to end up with a decent amount of buying power during your senior years.
In fact, it’s important to invest heavily in stocks for retirement. If you stick to bonds, you may not enjoy the same level of growth, which could lead to financial troubles down the line.
But what if you’re not a stock-picking wiz? That’s OK — not everyone is. Thankfully, there’s another approach to investing you can take that’s likely to help you end up with 10 times the amount of money you put into your nest egg.
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While you could load your retirement plan with individual stocks in the hope of growing wealth, broad market index funds may be a more suitable bet for your nest egg. Index funds are passively managed and have the goal of matching the performance of the benchmarks they’re tied to. And so an S&P 500 index fund would aim to perform as well as the S&P 500 itself.
Meanwhile, between 1957 and 2021, the S&P 500 managed to deliver an average annual 10.5% return. That returns accounts for both strong years and years that were less than stellar.
Now, getting back to your retirement account. Let’s assume that you manage to sock away $300 a month over a 40-year period. That means you’ll end up contributing $144,000 in total.
If you invest your savings in S&P 500 index funds, you might enjoy a 10% average annual return during that time, since that’s clearly in line with the index’s historical average. And in that case, you’ll be left with a cool $1.59 million after four decades. That’s a little more than 10 times the amount of money going into your savings.
Now to be fair, that incredible growth isn’t just a function of choosing the right investment. It’s also a function of time — in this case, a 40-year savings window.
If you wait too long to start funding your retirement savings, you may not end up with 10 times the amount of money you contribute — even if you load up on broad market index funds and they happen to perform well. But if you stick to this simple, effective strategy, you could end up with quite a lot of wealth by the time your retirement rolls around.
Now one thing worth noting is that broad market index funds won’t let you beat the market. If you pick your own stocks, you could end up with an average annual return that’s well beyond 10%.
But that may also be a riskier approach to building wealth — one that might leave you feeling perpetually stressed. And that’s just not worth it — not when you can rely on the power of the broad market to get you to your goals or even, in an ideal world, surpass them.
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