One great index fund turns $450 a month into $939,100 by retirement ($17,100 in annual dividend income)

of S&P500 (^GSPC 0.29%) Consistently rising over time, the index consistently outperforms investment-grade bonds, real estate, and gold. That makes S&P 500 index funds a very attractive investment option when saving for retirement.

Renowned investor Warren Buffett himself recommends the strategy. The S&P 500 index fund is essentially a basket of U.S. stocks, which Buffett believes is “virtually certain to be much more valuable in the coming years.”

of Vanguard S&P 500 ETF (VOO 0.30%) Specifically, $450 a month can turn into $939,100 over 30 years. This portfolio could generate $17,100 in annual dividend income in retirement. Here’s how:

The Vanguard S&P 500 ETF spreads your money across many influential stocks.

The Vanguard S&P 500 ETF tracks the performance of 500 of the largest U.S. companies across all 11 market sectors, from value to growth stocks. Index funds provide easy access to many of the world’s most influential companies. Details of the top 10 Vanguard S&P 500 ETFs (as of January 18, 2024) are as follows:

1. apple: 7%
2. Microsoft: 7%
3. alphabet: 3.8%
4. Amazon: 3.4%
5. NVIDIA: 3.1%
6. Metaplatform: 2%
7. Tesla: 1.7%
8. Berkshire Hathaway: 1.6%
9. JPMorgan Chase: 1.2%
10. Broadcom: 1.2%

The Vanguard S&P 500 ETF offers broad diversification at a very low price. The expense ratio is 0.03%, well below the average of 0.37%, meaning an investor will pay just $0.30 per year on his $1,000 investment.

Index funds also offer a certain degree of safety. The S&P 500 has been a profitable investment every 20 years since its creation in 1957. This means that investors are virtually guaranteed to make a profit for the next 20 years if they stay invested.

How a $450 monthly investment can grow to $939,100 and generate $17,100 in annual dividend income.

The S&P 500 has returned 1,680% over the past 30 years, compounded annually at 10.06%. At this rate, his $450 invested monthly in the Vanguard S&P 500 ETF will grow to $90,200 in 10 years, $325,500 in 20 years, and $939,100 in 30 years. These numbers assume all dividends are reinvested.

At that point, after building a portfolio of $939,100 over 30 years, an investor could stop reinvesting dividends to generate passive income for retirement. The average dividend yield for the S&P 500 over the past 10 years was 1.83%. At that rate, a $939,100 portfolio invested in an S&P 500 index fund would generate approximately $17,100 in dividend income annually.

If you keep your principal invested, your annual dividends will also grow over time. Here’s how: Without reinvesting dividends, the S&P 500 returned 7.98% annually over the past 30 years. At this rate, the $939,100 you invested in the S&P 500 index fund will be worth more than $1.3 million after five more years (or 35 years from inception). Assuming a dividend yield of 1.83%, this new total would provide you with $25,200 in annual dividend income.

Vanguard S&P 500 ETF is a good option for almost any investor

Index funds may not be exciting, but the S&P 500 has been a steady source of income for patient investors. Even better, his annual return over the past 30 years was 10.06%. Investors will be hard-pressed to find a better risk-reward ratio in a retirement savings vehicle. That’s why Warren Buffett has been passionate about the S&P 500 index fund for more than a decade.

Finally, investors don’t have to choose between individual stocks and S&P 500 index funds. I personally split my portfolio between growth stocks and the Vanguard S&P 500 ETF. If my stocks outperform, my portfolio will outperform and I can take more vacations. But the S&P 500 has been a profitable long-term investment throughout its history, so you know your portfolio will be fine even if the stocks perform poorly.