If you’re hoping for a financially secure retirement, you’ll likely want to aim for a nest egg of at least $1 million. A million-dollar retirement account would produce an annual income of around $40,000 per year if you maintain a safe withdrawal rate. This will ideally give you a comfortable life, along with your Social Security benefits.
Investing enough to amass $1 million may seem daunting, though — especially if you aren’t comfortable picking individual stocks.
The good news is, you don’t have to be a stock-picking guru to gain equity exposure. In fact, it’s absolutely possible to retire a millionaire with one of the simplest investments of all: an ETF.
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What are ETFs?
ETFs are exchange-traded funds. They’re similar to mutual funds in some ways, in that money from multiple investors is pooled to buy many specific assets, effectively giving the individual investor a small ownership stake in each. But unlike mutual funds, ETFs are traded like stocks on equity exchanges. That means you can buy and sell them when you want and don’t have to make a large minimum investment, a requirement in many mutual funds.
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ETFs are often, but not always, passively managed and they often track financial indexes. For example, you could buy an ETF that tracks the performance of the S&P 500. That’s an index made up of around 500 of the largest U.S. companies.
You can also buy niche ETFs that focus on providing exposure to a narrower range of assets, such as a marijuana ETF that allows you to buy into a pool of investments in the cannabis industry, or a cryptocurrency ETF that gives you a small ownership stake in many companies that operate in the crypto market.
ETFs generally come with low fees. And because you effectively buy many different assets with a single ETF purchase, they are a pretty low-risk investment due to the instant diversification they offer.
How can ETFs help make you a millionaire retiree?
ETFs are a great choice if you hope to become a millionaire retiree, because you can get your money into the stock market without having to understand how to invest in individual companies or how to research which businesses are likely to see their share value increase.
Choosing an ETF is easy. If nothing else, you can simply opt for an S&P 500 ETF. That’s what Warren Buffett recommends for most investors. You can also do a little more legwork and buy several funds that provide exposure to a good mix of different kinds of assets. For example, if you pick small-cap, mid-cap, and large-cap ETFs along with an emerging market fund, a bond fund, and a real estate fund, you’ll have a very diverse portfolio invested in small, midsized and large companies, bonds, foreign companies, and real estate.
Many ETFs provide relatively consistent returns. So, if you put enough money into them based on historical returns and your projected retirement timeline, you’re all but certain to amass the $1 million (or more) that you feel you need for a secure future.
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