1. The index fund portfolio
The average long-term growth rate of the S&P 500 is around 7% after inflation. Your $640 contribution every month would increase to $1 million in 35 years, at this rate.
Then, add your employer’s matching contributions to your $640 a month, and you will reach 7 figures a lot faster. A matching contribution of $340 a month will get you to millionaire rank in less than 30 years.
Achieving market-level returns: What is exciting with this is that you can invest straight to the S&P 500 to make those market-level returns. An S&P 500 index fund is the same as the S&P 500’s performance, with only a small drag to handle fund expenses. Pick a fund with a very low expense ratio, and the returns should be a notch under the index.
Limiting volatility in your portfolio: Even though the S&P 500 averages 7% yearly growth over long time periods, the short-term performance can be unstable. If you invest all of your contributions in an S&P 500 fund, the balance in your portfolio will show the full strength of the market’s downs and ups. It can be stressful to watch.
You can match your S&P 500 fund with a more stable security, like a United States Treasury bond fund to limit that volatility. A bond fund might hold 10 precent of your contributions when you are young, you should slowly increase that percentage as you get closer to retirement.
A bond fund added to your investments will moderate your returns.
2. The target date fund
Try a target date fund (TDF) if you want something more simple than the index fund portfolio. TDFs combine bonds and stocks into one fund.
The composition of bonds and stocks in a Target Date Fund is made to work with your retirement timeline. That means you do not have to change your portfolio to be more conservative as you age. The fund automatically does this for you.
Your 401(k) most likely offers you one set of TDFs with many vintages. The vintage — the date in the fund name — should match the retirement year you have planned.
It is smart to take an extra step and review the fund documentation. You should watch how the fund moves from aggressive to conservative over a period of time. If that change feels too aggressive or conservative, you can pick a different vintage. A fund with a target year that is later would be more aggressive. To be more conservative you would select an earlier vintage.
Building an above-average retirement
Earning wealth for retirement takes some time, however it does not have to be complicated or hard. A single TDF or a portfolio of two index funds can do the job.
If you think the idea of retiring as a millionaire is appealing you should make sure to check your 401k investment selections and plan on looking over your account’s performance regularly. The progress may be slow at the beginning but continue with your plan and it will pay off.
Author: Blake Ambrose