gGood news: the average 401 (k) contribution could fund a millionaire’s retirement. That average contribution, according to a 2021 Fidelity retirement report, is $ 640 per month.
The point is, making the right contribution is only part of the challenge of funding retirement. You should also stick to these contributions and invest them appropriately over time.
Read on for a quick rundown of two easy retirement investing plans – both can help you turn an average contribution into an above average retirement.
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1. The index fund portfolio
The long-term average growth rate of the S&P 500 is around 7% after inflation. At that rate, your monthly contribution of $ 640 would increase to $ 1 million in 35 years.
Add employer matching contributions to that monthly $ 640 and you hit seven figures even faster. Specifically, an average matching contribution of $ 340 per month allows you to achieve millionaire status in less than 30 years.
- Achieve market-level returns: What’s exciting here is that you can invest directly in the S&P 500 to get these market-level returns. An S&P 500 index fund mimics the performance of the S&P 500, with only a slight drag to cover the fund’s expenses. Pick a fund with an ultra-low expense ratio, and the returns should be just a notch below the index itself.
- Limit the volatility of your portfolio: Although the S&P 500 shows an average annual growth of 7% over long periods of time, short-term performance can be volatile. If you invest 100% of your contributions in an S&P 500 fund, your portfolio balance will reflect all the strength of the ups and downs of the market. It can be stressful to watch.
To limit this volatility, you can combine your S&P 500 fund with more stable security, such as a US Treasury bond fund. You could hold 10% of your bond fund contributions when you are young, gradually increasing this percentage as you approach retirement.
Adding a bond fund to your portfolio will moderate your returns. But many investors accept this in exchange for a smoother growth path.
2. The target date fund
If you want something simpler than the index fund portfolio, try a target date fund (TDF). TDFs combine stocks and bonds into one fund.
Better yet, the composition of the stocks and bonds of a TDF is adapted to your retirement schedule. This means that you don’t have to change your wallet to be more conservative as you get older. The fund does this automatically for you.
Your 401 (k) probably offers you a TDF family with several vintages. The vintage – the date in the name of the fund – should match your expected retirement year.
It is a good idea to take a further step by reviewing the fund’s documentation. Specifically, research how the fund goes from aggressive to conservative over time. If this transition seems too conservative or aggressive, you can choose another vintage. A fund with a later target year would be more aggressive. You would choose an earlier vintage to be more conservative.
Building an Above-Average Retirement
Building wealth for retirement takes time, but it doesn’t have to be difficult or complicated. A simple portfolio of two index funds or a single TDF can do the trick, even with an average pension contribution.
If you like the idea of retiring as a millionaire, check your 401 (k) contributions and investment picks today. From there, plan to periodically review your account’s performance. The momentum will be slow at first, but stick to your plan. Ultimately, you will be eager to see how close to becoming a millionaire retiree you are.
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