Legendary investor Warren Buffett says that “it is not necessary to do extraordinary things to get extraordinary results.” While Buffett himself is widely regarded as one of the best stock-picking investors of all time, he also acknowledges that most people shouldn’t try to beat the market with individual stocks.
In fact, Buffett has said that the best investment most people can make in their brokerage account is a low-cost S&P 500 index fund, and then to hold onto it for a long time, regardless of what the stock market or U.S. economy is doing.
Although this might sound like a boring approach to investing, that doesn’t mean that it can’t build quite a bit of wealth over the long run. In fact, you might be surprised at how much a $500 monthly investment could produce in eventual retirement income.
The S&P 500 has been a strong performer over time
If you aren’t familiar, the S&P 500 is a benchmark index that consists of around 500 of the largest publicly traded companies in the United States and is designed to reflect the overall performance of the U.S. stock market. It is widely considered to be the best market indicator of the major stock indices.
From 1965 through 2023, the S&P 500 produced 10.2% annualized total returns (dividends plus stock price gains) for investors. In each individual year, the performance varied sharply — it was as high as 37.6% in 1995 and as low as negative 37% in 2008. But there have been far more good years than bad, and over long periods of time, there is no more surefire wealth creator than the S&P 500.
How much can your money grow?
As the headline suggests, let’s take a look at how much of a nest egg you can build if you invest $500 per month into an S&P 500 index fund and just leave it alone.
Of course, this depends quite a bit on how old you are, as well as when you’d like to start drawing retirement income from your investment. In other words, someone who starts investing $500 per month at age 25 would clearly have a larger IRA balance at 65 than someone who started at age 45. That’s not to say that it isn’t worth starting if you’re in your 40s or 50s (it definitely is!), but the point is that your timetable plays a big role.
With that in mind, let’s look at how much retirement income you can expect from monthly $500 investments into an S&P index fund. We’ll use the following assumptions:
- 10% average annualized total return, although there is no way to predict the actual long-term performance with complete accuracy.
- You use the “4% rule” of retirement, which says that you can safely withdraw 4% per year from your retirement investments, without fear of running out of money.
| Time Until Retirement | Total Money Invested | Ending Value at 10% Returns | Monthly Retirement Income |
|---|---|---|---|
| 10 years | $60,000 | $95,625 | $319 |
| 20 years | $120,000 | $343,650 | $1,146 |
| 30 years | $180,000 | $986,964 | $3,290 |
| 40 years | $240,000 | $2,703,404 | $9,011 |
Data source: Author’s own calculations. Based on 10% annualized total returns and 4% retirement withdrawal rate. All figures rounded to the nearest dollar.
The best time to start
As you can see, while putting your money into a basic S&P 500 index fund might sound boring, the results are not — especially if you start early. The key is to make regular investments and hold on to your index funds, no matter what the stock market is doing.
Of course, an investment’s past performance isn’t likely to be exactly the same as its future results. But the point is that even if you want to put your retirement savings on autopilot with a low-cost index fund, you can still generate a massive amount of wealth over time. So, there’s no better time to get started than right now.
