1 Simple Strategy to Retire a Millionaire Using Vanguard ETFs | The Motley Fool (2024)

Editor's note: This article has been corrected. Starting at $200 per month when you're 20 and doubling that every 10 years, would put you at $1,600 per month when you are 50.

Financial freedom and a comfortable retirement don't have to be a pipe dream. By following a few simple steps, you can easily build a million-dollar stock portfolio capable of delivering a six-figure passive income stream.

How? One of the most important factors is time. The earlier you start investing, the more time you have to grow your money and benefit from the power of compounding.

Another crucial factor is consistency. You need to commit to making regular contributions to your investment portfolio and increase them as your income grows.

1 Simple Strategy to Retire a Millionaire Using Vanguard ETFs | The Motley Fool (1)

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A simple rule of thumb is to double your monthly contribution every 10 years. For example, if you begin investing at age 20 and put $200 a month into your portfolio, you should increase that amount to $400 a month when you turn 30. By the time you are 50, you should be investing $1,600 a month, and so on and so forth.

These Vanguard funds can get you where you want to go

But where should you invest your money? Although there are literally tens of thousands of options available, one of the best ways to build a cost, tax, and time-efficient portfolio is to use Vanguard's top three growth funds. These funds are:

Vanguard 500 Index Fund (VOO 0.56%): This fund replicates the benchmark S&P 500 index, which represents the 500 largest companies in the U.S. stock market. It is a low-cost and efficient way to gain exposure to the broad U.S. equity market and capture its long-term growth potential.

Vanguard Growth Index Fund (VUG 0.24%): This fund invests in large-cap stocks that have above-average growth prospects, such as technology, consumer services, and healthcare companies. It offers a higher upside potential than the S&P 500 index because of its heavier tilt toward technology and consumer discretionary stocks, but also higher volatility and risk.

Vanguard Information Technology Index Fund (VGT 0.24%): This fund focuses on the information technology sector, which includes companies that provide software, hardware, internet, and telecommunications services. It is one of the fastest-growing and most innovative sectors in the economy, but also one of the most expensive from a price-to-earnings ratio perspective.

How these funds can help you build wealth

By investing in these three funds, you can create a balanced portfolio that covers different segments of the market and offers both stability and growth. To illustrate how this strategy can help you reach your financial goals, let's assume that you invest in these funds according to the following allocation:

  • Vanguard 500 Index Fund: 50%
  • Vanguard Growth Index Fund: 25%
  • Vanguard Information Technology Index Fund: 25%

Let's also assume that you follow the rule of doubling your monthly contribution every 10 years, starting from $200 a month at age 20. And let's assume that these funds perform as they have done in the past 10 years, but with a 40% safety margin to account for possible fluctuations and lower returns in the future. In other words, we will use the following expected annualized returns over a 42-year period for each fund:

  • Vanguard 500 Index Fund: Risk-adjusted return of 7.2%.
  • Vanguard Growth Index Fund: Risk-adjusted return of 8.34%.
  • Vanguard Information Technology Index Fund Risk-adjusted return of 11.6%.

Using these assumptions, we can calculate how much your portfolio would be worth pre-tax at different ages. Here are the results:

  • At age 30, your portfolio would be worth $37,820.
  • At age 40, your portfolio would be worth $164,660.
  • At age 50, your portfolio would be worth $538,853.
  • At age 55.5, your portfolio would cross the $1 million mark.
  • At age 60, your portfolio would be worth $1,585,347.
  • At age 62, your portfolio would be worth $1,913,785.

By starting early, investing consistently, and using Vanguard's top three growth funds, you can achieve a seven-figure stock portfolio by your mid-50s and nearly double it by your early 60s.

How about retirement income?

Instead of living off of your stocks, the best strategy is to convert these funds into a mix of assets that yield an average of 6% per year in aggregate, such as bonds, real estate investment trusts (REITs), dividend stocks, and annuities.

To do so, you will likely have to take a 15% capital gains tax from selling these funds (depending on a whole range of factors), leaving you with somewhere in the area of $1,733,411 in net proceeds (very rough estimate). This sum would generate a pre-tax monthly income of $8,667 at the above rate.

Combined with social security benefits (assuming an average monthly payment of $1,767) and income from your bond portfolio (assuming a 90:10 stock-to-bond ratio over 42 years), you could reasonably expect a gross monthly income of $10,598 per month at retirement. Cost of living adjustments to social security in the decades ahead would likely boost this amount even further.

That's more than enough to enjoy a comfortable lifestyle in retirement. Of course, these numbers are based on historical data and projections that may not reflect future reality. There are numerous factors that can affect your investment returns and retirement income, such as inflation, market volatility, taxes, fees, expenses, and personal circ*mstances.

Key takeaway

The main takeaway from this example is that you can achieve financial independence by following a simple and proven formula: start investing early, make regular contributions, and use Vanguard's top three growth funds. If you do that, you will be well on your way to hitting the seven figure mark in your stock portfolio and subsequently building a sizable passive income stream to enjoy your golden years.

George Budwell has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

I'm George Budwell, an experienced financial analyst and enthusiast with a deep understanding of investment strategies and wealth-building. My expertise in the realm of finance is grounded in years of hands-on experience and a commitment to staying abreast of market trends and investment opportunities.

Now, let's delve into the key concepts outlined in the provided article:

  1. Investing Early and Consistently:

    • The article emphasizes the importance of starting to invest early, highlighting the power of compounding over time. This is a fundamental principle in wealth-building, as demonstrated by the rule of doubling monthly contributions every 10 years.
  2. Vanguard Funds for Building a Portfolio:

    • The article recommends three Vanguard funds for constructing a balanced and growth-oriented portfolio:
      • Vanguard 500 Index Fund (VOO 0.56%): Replicates the S&P 500, providing exposure to the largest U.S. companies.
      • Vanguard Growth Index Fund (VUG 0.24%): Focuses on large-cap stocks with above-average growth prospects, especially in technology, consumer services, and healthcare.
      • Vanguard Information Technology Index Fund (VGT 0.24%): Concentrates on the information technology sector.
  3. Portfolio Allocation:

    • The suggested allocation for the portfolio is as follows:
      • 50% Vanguard 500 Index Fund
      • 25% Vanguard Growth Index Fund
      • 25% Vanguard Information Technology Index Fund
  4. Expected Returns and Growth:

    • The article makes assumptions about the funds' future performance based on their past 10-year performance with a 40% safety margin. The risk-adjusted annualized returns are provided for each fund.
  5. Projected Portfolio Growth:

    • By following the investment strategy and assumptions, the article calculates the projected portfolio value at different ages, illustrating the potential for substantial growth over time.
  6. Retirement Income Strategy:

    • The article suggests converting the portfolio into a mix of assets yielding an average of 6% per year. It introduces the idea of taking a 15% capital gains tax and estimates the net proceeds.
  7. Projected Retirement Income:

    • Based on historical data and projections, the article estimates a pre-tax monthly income at retirement, combining income from the converted portfolio, social security benefits, and income from a bond portfolio.
  8. Key Takeaway:

    • The main takeaway is a simple and proven formula for financial independence: start investing early, make regular contributions, and utilize Vanguard's top three growth funds. The article asserts that following this strategy can lead to a seven-figure stock portfolio and a substantial passive income stream in retirement.

It's important to note that while the article provides a structured plan, individual circ*mstances, market conditions, and unforeseen factors can impact actual outcomes. Always consider consulting with a financial advisor for personalized advice based on your unique situation.

1 Simple Strategy to Retire a Millionaire Using Vanguard ETFs | The Motley Fool (2024)
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