Make no mistake about it – the number of people saving for their golden years is on the decline.

While in many cases this might be because of a lack of disposal income, often times we take a ‘hear and now’ attitude to life. However, failing to acknowledge the consequences of retiring without a nest egg can be fatal.

The good news is that you really don’t need to break the bank to retire with a sizable sum – especially if you are still below the age of 35.

To test this theory, I wanted to see what the outcome *could* be if you put just $200 to one side each and every month for the next 20-30 years.

**Which investments are suitable for a long-term retirement plan?**

First and foremost, you need to think about *which* investments to focus on. Crucially, these need to be asset classes that offer two key characteristics:

- Assets that come with relatively low risk
- A consistent track record of generating returns over the course of time

Your chosen asset class *must* have met the above two metrics over several decades – at least. In doing so, this shows us that irrespective of wider economic conditions (such as recessions), the investment class in question has always bounced back.

Now, in my view, there are two investments, in particular, that stand out from the crowd – real estate and the S&P 500 Index. As this article is looking to see what the outcome could be with an investment of just $200 per month, we need to discount the real estate option.

As such, the focus hereon is going to be on the S&P 500.

**What is the S&P 500?**

In a nutshell, the S&P 500 is a stock market index. It consists of 500 large companies that are publicly listed in the US. This includes some of the largest and best-known brands globally. Think along the lines of Apple, Amazon, Facebook, IBM, Microsoft, Disney, Nike, Ford, Paypal, and Visa.

Now, when you invest in an index fund that tracks the S&P 500, you are essentially buying shares in *all* 500 stocks.

However, this is based on a ‘weighting’ system – meaning you will hold a larger proportion in bigger companies like Apple and Amazon, than you would with smaller firms such as Etsy, Expedia, and United Rentals.

For example

- Let’s suppose that you invested $200 into the S&P 500
- At the time of the investment, Amazon has a 4% weighting
- This means that 4% of your portfolio is invested in Amazon ($8)
- Similarly, IBM has a 1% weighting
- As such, 1% of your portfolio is invested in IBM ($2)

The best thing about the S&P 500 is that every three months, the index will be rebalanced. This means that better-performing companies might have their weighting *increased*, while the opposite might happen to poor-performing firms.

All in all, this ensures that your investment is reflective of the wider US economy throughout the course of time.

**Why the S&P 500 is your golden ticket to a retirement pot**

So now that I have covered what the S&P 500 is, I now need to explain why I think it is without a doubt the best long-term investment for your retirement plan.

So, the S&P 500 was first launched in 1926. This is crucial, as this gives us a sample size that spans almost 100 years. In other words, the S&P 500 has not only gone through the second world war, but heaps of global recessions.

In terms of the figures, the index has grown by an ‘average annualized’ rate of 10% since its inception. This is averaged out across the entire lifespan of the S&P 500, so it takes into account both good and bad years.

For example, in 2019 the index grew by 28%, which is huge. Again, in 2013 the index grew by a remarkable 29%. However, in 2008, the S&P 500 lost 38% in value. Crucially, like all financial assets, the S&P 500 will go up and down. While in some years your money will grow, in others the value of your portfolio will decline.

This is why it is really important to avoid taking your money out. Instead, by not only *leaving* your S&P 500 investment where it is for several decades, but continuously *adding* to it, you can ride out these short-term waves.

**How much will you retire on by investing $200 per month?**

So far, we have established that over the past 94 years, the S&P 500 index has made average annualized returns of just over 10%.

With this in mind, we now need to look at the cold-hard calculations. That is to say, how much could your money be worth in 20-30 years if you invested $200 each month into the index – *assuming* the same annual return of 10%.

- By investing $200 every month for
**20 years**, you would retire with**$138,805** - By investing $200 every month for
**25 years**, you would retire with**$238,199** - By investing $200 every month for
**30 years**, you would retire with**$398,275** - By investing $200 every month for
**40 years**, you would retire with**$1,071,273**

As you can see from the above, there is a clear disparity in how much you will retire on depending on the length of the investment plan. For example, while $200 per month for 20 years returns just $138k, a 40-year plan would net over a million dollars.

If anything, this should highlight the importance of starting a retirement investment plan as soon as practically possible.

Put simply, a shrewd 18-year old that has just started work would, in theory, have a pot worth over $1 million by the age of 58. This is, of course, on the proviso that the S&P 500 continues with its historical average annualized return of 10% per year.

Taking the above into account, investing $200 per month might not quite cut it if you have started your retirement plan at a later age. For example, if you start when you are 45, you would only have $138k by the time you hit 65.

As such, we should explore what the numbers look like when we increase the monthly investment amount. For simplicity, I’ll go with $300 and $500 per month.

- By investing
**$300**every month for**20 years**, you would retire with**$208,208** - By investing
**$300**every month for**30 years**, you would retire with**$597,413** - By investing
**$500**every month for**20 years**, you would retire with**$347,013** - By investing
**$500**every month for**30 years**, you would retire with**$995,688**

For me, the most interesting calculation here is the $500 monthly investment over 30 years. The reason being, you could still start your retirement investment plan at the age of 30, and retire with just under $1 million by the age of 60.

To reach the same figure by investing just $200 per month, you would need to save for an additional 10 years.

**What to do with your S&P 500 nest egg on retirement?**

Once you reach the age of retirement, you then need to think about what you plan to do with your S&P 500 funds. After all, the money will be held at your respective stock broker until you decide to cash out.

There are many options at your disposal here, each of which comes with its own risks and rewards.

**Annuity**

You might consider an annuity. This is where you invest some, or all your retirement funds with an annuity provider, who in turn, will pay you a fixed amount of money until you pass away.

This is a reasonably safe option, as you know exactly how much you have to live on for the remainder of your life. It goes without saying that the more you have to invest in the annuity, the higher the monthly payments will be.

The exact figures will vary, but according to my own research, the ball-park numbers are as follows:

- If you invested
**$1 million**and you sought to**retire at 60**, you might get in the region of $31k per year. That works out at about**$2,583 per month**. - However, if you invested the same amount but chose to
**retire at 55**, the annual payment goes down to about $28,000 annually – or**$2,333 per month**

Now let’s look at what the figure would be if you invested $500,000 into an annuity:

- If you invested
**$500k**and you sought to retire at 60, you might get in the region of $15,400 per year. That works out at about**$1,283 per month**. - However, if you invested the same amount but chose to retire at 55, the annual payment goes down to about $13,800 annually – or
**$1,150 per month**

As you can see from the above, your potential monthly income from an annuity drops massively from an injection of $1 million to $500k. Additionally, the age that you choose to retire on an annuity will impact your monthly payments, too.

The key problem with an annuity is that once you inject your money – that’s pretty much it. Sure, you’ll have a guaranteed income until you pass away. But, you won’t have access to your capital – meaning that you’ll likely miss out on other investment opportunities.

This is why you might be best opting for a real estate portfolio.

**Real Estate**

I had to initially discount real estate, as a small monthly investment of $200-$500 would not be possible. Well, not unless you opted for a real estate crowdfunding platform – but that’s a discussion for another time.

However, assuming that you opted for the S&P 500 Index over at least 20-30 years, then you should have a significant amount of money to build a portfolio of real estate properties.

Crucially, not only should the value of your properties appreciate over the course of time, but you will benefit from a passive income in the form of monthly rental payments. Plus, although real estate is still an illiquid asset class, you are not locking your money away indefinitely like you would with an annuity.

In terms of how much you should expect to live on by opting for a real estate portfolio with your retirement funds, this can vary considerably. After all, not only does it depend on how much you have saved over the past few decades, but the specific housing market that you have access to.

For example, in the UK, the average rental yield stands at just 3.53%. This means that a $1 million property would yield $35,300 annually, or $2,941 monthly. However, certain areas are, of course, going to yield much higher returns. Not only on a city-by-city basis, but regionally, too.

This is especially the case in the US housing market. For example, Hot Springs in Arkansas is currently averaging an annual yield of 10.1%. The likes of Palm Springs in California and Kissimmee in Florida are both yielding well over 8% annually.

These sort of returns are available not just in the US, but globally. It’s just a case of finding a strong housing market that you have access to.

To give you an idea of what your monthly retirement income could look like when targeting a rental market that yields 8%, check out the following examples:

- If you retired with
**$1 million**, an 8% yield would get you $80,000 per year, or**$6,666 monthly** - If you retired with
**$500k**, an 8% yield would get you $40,000 per year, or**$3,333 monthly** - If you retired with just
**$200k**, an 8% yield would get you $16,000 per year, or**$1,333 monthly**

In the meantime, as long as you are targeting historically strong real estate markets (think the US, Europe, Australia, New Zealand, etc.), the value of your investment will continue to rise. This is because of appreciation.

**Inflation**

Before I conclude this article, it is absolutely crucial to consider the impact of inflation. After all, this devalues your investment year-on-year, depending on the current inflation rate.

In its most basic form, if inflation in your country of residence stands at 2% over the next 12 months, you need your money to grow by at least 2% just to ‘break-even’. Anything above this figure is realizable growth.

This is why leaving your money in a bank account these days can be disastrous for your long-term financial goals. This is especially the case in the US and Europe, where the average annual interest rate paid by banks is well below 1%.

Ultimately, while the S&P 500 Index has achieved average annualized returns of 10% since its inception in 1926, the ‘real’ figure should be viewed at 7%. This takes into account the average rate of inflation during the same period.

**The Verdict?**

In summary, there are simply too many variables to take into account when figuring out how much you can realistically retire on. Not only does this include the amount you can afford to invest per month, but the specific asset class that takes your fancy.

With that said, if we were to invest $200 per month into the S&P 500 for the next 30 years – and it continued to yield an average annual return of 10%, this would translate into a retirement pot of just $398,275.

But, if we were able to increase this to $500 per month, we would get just below the $1 million figure. In turn, this would give you heaps of options when you reach your retirement age.

While many people consider an annuity, I strongly believe that real estate is the best way to invest your retirement pot when the time comes around. And don’t forget, the main chink in the armour with any calculations that you make is that of inflation.