Key insights
- The article analyzes the feasibility of reaching $1 million in 20 years by investing $500 monthly in an S&P 500 ETF. It concludes that achieving this goal is unlikely given historical S&P 500 returns, suggesting investors either increase their monthly investment or extend their investment timeframe. This highlights the challenges in achieving high returns in broad market ETFs, signaling potentially lower investor enthusiasm for passive strategies.
Everybody wants to be a millionaire. Far fewer understand the math that helps you get there.
It's pretty simple actually. It all depends on:
You can control the first. Unless there's an emergency or a significant requirement for cash along the way, you can control the second factor too.
The third one, however, is a wild card. That's why you usually hear the most common -- and also the most effective -- investing advice: invest as much as you can, as early as you can. Even if your returns end up coming in lower than expected, you still have a reasonable shot at reaching your goal.
If you have $500 per month to invest for the next 20 years, and your goal is to reach $1 million at the end of that period, it becomes a simple math problem. If you know what you need, you have a greater chance of getting there!
To figure out the return you need to get to $1 million, you only need a financial calculator. Your monthly investment will be $500. The number of periods will be 240 (20 years * 12 months/year). Your future value will be $1 million. Calculate for the monthly rate of return, and you get 1.42%.
That translates to an average annual rate of return of approximately 18.4%.
Considering that the S&P 500 has returned roughly 10% annually over the past century, it's unlikely that we'll see annual returns of 18-19% over the next two decades if you invest in an ETF, such as the Vanguard S&P 500 ETF (VOO +0.79%), that tracks the index.
That means it's time to look for alternative paths to get to $1 million.
The two most logical ways to get to the $1 million mark are to increase the amount of money you invest monthly or invest for longer than 20 years.
Let's adjust the inputs to see how much closer we can get:
Barring some type of extraordinary performance, a $500 monthly investment made over 20 years won't get you to $1 million. So increasing your monthly investment and the length of time you invest is the best path to hitting the target.