Can the S&P 500 Be the Sole Component for Achieving Millionaire Status in Retirement?
As retirement approaches, managing investments becomes crucial to maintaining a balanced portfolio. Even after retiring, it's essential to continue monitoring and managing investments to ensure the balance remains in check [1].
One investment option with an impressive long-term track record is the S&P 500, a collection of large, generally financially stable companies [2]. Over the long haul, the S&P 500 has provided annualized returns somewhere in the neighborhood of 9% to 10% [3]. However, when it comes to near-term retirement expenses, it's wise to opt for investments that offer higher certainty.
For such needs, investments like High-Yield Savings Accounts (HYSA), Money Market Funds, Short-Term Certificates of Deposit (CDs), Government Bonds (including Treasury Bonds), and Deferred Income Annuities (DIAs) provide a combination of safety, liquidity, and income certainty [1]. These options are preferable to stocks, which while offering growth potential, carry more volatility and risk [4].
Hybrid Savings Accounts (HYSA) offer liquidity and stable, modest returns typically higher than regular savings accounts. They provide easy access to funds without the risk of loss [1]. Money Market Funds invest in short-term debt instruments and CDs, offering low risk, stability, and liquidity similar to a HYSA but often with slightly higher yields [1].
Short-Term CDs provide fixed interest rates and principal protection when held to maturity. They limit exposure to interest rate risk and can be laddered for liquidity [3]. Government Bonds, virtually risk-free as they are backed by the U.S. government, provide predictable income through interest payments and tend to have lower volatility than stocks [4].
Deferred Income Annuities (DIAs) allow you to convert a lump sum into guaranteed income starting at a future date, which can supplement Social Security or other income sources. DIAs offer lifetime income and tax deferral advantages, reducing the risk of running out of money [1].
Strategic advice includes maintaining a cash buffer covering 2-3 years of expenses in liquid accounts (HYSA, money market funds, or short-term CDs) to shield against market downturns and sequence of returns risk when near retirement or during early retirement [2]. A five-year buffer of higher-certainty investments provides a reasonable balance point, allowing time to ride out most typical market corrections without selling stocks [5].
While an S&P 500 fund is a reasonable choice for the stock portion of the portfolio, it's better suited for long-term needs than short-term ones. A retirement plan that relies 100% on stocks is incredibly risky [6]. At today's low interest rates, returns from cash, CDs, and high-quality bonds are not likely to keep up with inflation [7]. Selling more shares in a down market to raise the same number of dollars can force you to quickly run through your portfolio [8].
In conclusion, a balanced portfolio is necessary for long-term success, consisting of enough cash, CDs, and high-quality bonds to cover near-term costs, and enough stocks to maintain purchasing power [9]. It's essential to put long-term investment plans into action today to improve chances for success.
When considering investments for near-term retirement expenses, it's wise to opt for options that offer higher certainty, such as High-Yield Savings Accounts (HYSA), Money Market Funds, Short-Term Certificates of Deposit (CDs), Government Bonds (including Treasury Bonds), and Deferred Income Annuities (DIAs). These investments provide a balance of safety, liquidity, and income certainty, making them preferable to stocks, which while offering growth potential, carry more volatility and risk. To safeguard against market downturns and sequence of returns risk during early retirement, maintaining a cash buffer covering 2-3 years of expenses in liquid accounts like HYSA, money market funds, or short-term CDs is strategically advised.
