Aiming for $1 Million by Retirement? Here's How Much to Invest Each Month Based on Age
Key Points
Investing in S&P 500 index funds can be a safer way to grow wealth than individual stocks.
The Vanguard S&P 500 ETF gives investors exposure to the leading U.S. stocks and is an excellent way to diversify.
Investing periodically in the ETF can help further reduce risk for investors, rather than putting in a large lump sum right away.
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A million-dollar portfolio can be a great goal for retirement. At such a large amount, an income-generating investment that yields 5% could bring in $50,000 per year. Retirees can also pull money out periodically, depending on their day-to-day needs.
The struggle for many investors inevitably becomes how to get to $1 million. While there are many tempting growth stocks to invest in that could generate significant long-term returns, there is going to be risk when it comes to investing in individual stocks; a lot can happen to a business, especially over a long time frame.
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A safer and more diversified approach is to simply track the market. A popular exchange-traded fund (ETF) is the Vanguard S&P 500 ETF (NYSEMKT:VOO), which tracks the leading stocks on the U.S. markets via the S&P 500 index. Historically, it's done tremendously well. Investing periodically can be a steady way to grow a portfolio, without taking on much risk.
Let's take a look at how much someone might need to invest in this type of ETF each month, in order to build up a portfolio worth $1 million by retirement.
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The monthly investment needed to get to $1 million by retirement, based on age
Not everyone can start investing early, but those who can have the advantage of needing to invest less per month, since they have more years for the money to compound and grow over time. Older investors, however, may be better-equipped to invest more money if they have higher-paying jobs at later stages in their careers.
I've created the table below, which shows how much someone would need to invest in a fund such as the Vanguard S&P 500 ETF each month, based on age and the expected annual growth rate, to retire with at least $1 million (assuming a retirement age of 65).
| Age | Years to Retire | 9% Growth | 10% Growth | 11% Growth |
|---|---|---|---|---|
| 45 | 20 | $1,486.11 | $1,306.00 | $1,144.72 |
| 40 | 25 | $885.32 | $747.45 | $628.70 |
| 35 | 30 | $542.16 | $438.73 | $353.33 |
| 30 | 35 | $337.40 | $261.21 | $201.07 |
| 25 | 40 | $212.02 | $156.82 | $115.22 |
| 20 | 45 | $134.04 | $94.61 | $66.29 |
Table and calculations by author.
Future returns are impossible to forecast, but historically, the S&P 500 has grown by 10% per year, which is why I've left a range of 9% to 11% to show what the amount would need to be if it underperforms or outperforms in the future. The conservative approach would be to invest based on the 9% rate, but the point is to show what a realistic range might be.
Why investing monthly can be the best option for investors
Investing a large lump sum can also lead to significant returns, but the advantage of making monthly investments is that it spreads the overall risk over a longer duration; investing a large lump sum can be great, but if it happens to be at a time when stocks are expensive and vulnerable to a crash, it may not prove to be ideal. Making periodic investments, thus, can be a safer long-term strategy to deploy.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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