The path to millionaire status is not about luck but discipline. This article dives deep into how Vanguard’s S&P 500 ETFs, from the broad market VOO to growth-focused VOOG, provide accessible, low-cost vehicles for long-term investors, even as the market grapples with concentration concerns and evolving retirement strategies like the FIRE movement.
Becoming a millionaire retiree might seem like a distant dream, often associated with fortunate breaks or highly speculative investments. However, the overwhelming majority of individuals who achieve significant wealth through investing do so not by chasing overnight sensations, but through a disciplined approach focused on diversified, historically sound investments over many decades. For many, this journey is anchored by accessible and efficient tools like Exchange-Traded Funds (ETFs), particularly those offered by Vanguard.
Vanguard has long been a beacon for cost-conscious investors, renowned for its carefully curated lineup of index and active ETFs that serve as fundamental building blocks for diversified portfolios. With over $2 trillion in ETF assets under management, Vanguard’s commitment to low costs and operational efficiencies directly benefits investors by ensuring more of their money stays invested in the market. The average Vanguard ETF expense ratio stands at an impressive 0.05%, significantly lower than the industry average of 0.22% (as of December 31, 2024, Vanguard.com).
The Power of the S&P 500 for Long-Term Growth
At the heart of many long-term investment strategies lies the S&P 500 Index. Widely regarded as a proxy for the U.S. stock market, it captures more than 80% of the domestic market’s value. The beauty of investing in S&P 500 index funds, such as the Vanguard S&P 500 ETF (VOO), is that it automatically provides exposure to 500 companies with a consistent track record of profitability.
With a single purchase, you become an investor in economic powerhouses like Microsoft, Apple, Amazon, Tesla, Johnson & Johnson, and Walmart. Historically, the S&P 500 has delivered average annual returns of around 10%, with positive returns in approximately 75% of any given year. Over longer periods, such as 20 years or more, returns have consistently been positive. The VOO fund stands out with an incredibly low expense ratio of just 0.03%, meaning only $3 of every $10,000 invested goes towards fees, maximizing your market exposure.
Reaching Millionaire Status with VOO
The earlier you begin investing, the less you’ll need to contribute monthly to reach millionaire status by age 65. Assuming a historical average annual return of 10% from the S&P 500, here’s an approximation of monthly investments needed:
- Starting Age 25: $159 per month
- Starting Age 35: $442 per month
- Starting Age 45: $1,317 per month
- Starting Age 55: $4,882 per month
These figures do not account for inflation, so gradual increases in contributions would be necessary to maintain purchasing power.
Beyond VOO: Exploring Vanguard’s Diversified Offerings
While VOO aims to track the S&P 500, Vanguard offers other funds that cater to different investment goals and risk tolerances, providing versatile building blocks for any portfolio.
VTSAX vs. VFIAX: Total Market vs. Large Cap Focus
For investors seeking even broader market exposure, the debate between the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and the Vanguard S&P 500 Index Fund Admiral Shares (VFIAX) is common. VTSAX tracks the CRSP US Total Market Index, encompassing nearly every publicly traded company in the U.S., including a higher percentage of mid and small-cap stocks (19% and 6% respectively). VFIAX, conversely, focuses solely on the top 500 large-cap companies. While both funds boast similar low expense ratios (0.04%), VTSAX offers slightly more diversification by including smaller companies that have historically outperformed large caps over the long run. Choosing VTSAX can provide an all-in-one solution for comprehensive market coverage.
VOOG: Capturing Growth in a Concentrated Market
For those aiming for market-beating returns by focusing on growth, the Vanguard S&P 500 Growth ETF (VOOG) has been a standout performer, up 27.4% in 2024. This ETF specifically targets growth stocks within the S&P 500 and is heavily weighted towards the world’s largest growth companies, often referred to as the “Magnificent Seven”: Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla. These top 10 holdings alone make up over 60% of VOOG’s value, with companies like Nvidia experiencing exceptional gains. While VOOG’s strategy doesn’t always pay off (it underperformed in 2022), its singular focus on large-cap growth has propelled its recent success. Despite higher price-to-earnings (P/E) ratios compared to the broader S&P 500, the forward P/E ratios of its top holdings suggest analysts anticipate significant future earnings growth, potentially justifying their premium valuations if that growth materializes.
Addressing Goldman Sachs’ Cautions: Concentration and the Future of the S&P 500
In October 2024, analysts at Goldman Sachs expressed concerns about slow returns in the S&P 500 for the next decade. Their prediction was based on historically lofty stock valuations and an increasingly concentrated market, particularly the dominance of a few mega-cap technology companies. Goldman Sachs suggested that investors might consider equal-weighted funds as an alternative to standard market-cap-weighted index trackers like VOO to mitigate this concentration risk (Bloomberg).
Interestingly, in the year following Goldman’s bearish forecast, the S&P 500 continued its upward trajectory, posting a total return of 14.9%. This growth was largely driven by the “Magnificent Seven,” with an ETF tracking these companies surging by 36.6%. Meanwhile, an equal-weighted S&P 500 tracker gained only 4.5% over the same period. While the short-term results didn’t align with the prediction, it’s crucial to remember that Goldman’s outlook was for a 10-year horizon, not just one year. The market’s current trajectory, heavily influenced by the AI boom and a few dominant companies, cannot continue indefinitely without potential rebalancing or corrections.
For investors concerned about market concentration, supplementing cap-weighted funds like VOO with equal-weighted funds, such as the Invesco S&P 500 Equal Weight ETF (RSP), offers a sensible diversification strategy. This approach can help cushion portfolios from the risks associated with a few companies holding disproportionate influence, providing a more balanced exposure across all 500 companies in the index.
Vanguard’s Principles for Retirement Success, Especially for FIRE Investors
For those pursuing financial independence and early retirement (FIRE), the traditional 4% rule of withdrawal, developed by William Bengen in 1994, serves as a common guideline. However, Vanguard’s research suggests updating this rule, especially for FIRE investors with longer retirement horizons (50 years or more), by incorporating several key investment principles:
- Estimate Future Returns Using Forward-Looking Predictions: Relying solely on historical market data (e.g., 1926-1992, as the original 4% rule did) can lead to overconfidence, especially when current bond yields are low. Vanguard’s Capital Markets Model (VCMM) provides strategic market and economic forecasts, which are more likely to accurately predict future performance (Vanguard Investment Research).
- Use an Appropriate Retirement Horizon: The 4% rule assumes a 30-year horizon. For a FIRE investor with a 50-year horizon, the success rate of the 4% rule drops significantly from 82% to just 36%. Tailoring the withdrawal rate to a realistic, longer time frame is crucial.
- Minimize Costs: Investment fees directly erode returns. An expense ratio of 0.2% can drop a 50-year FIRE investor’s success rate from 36% to less than 28%, and a 1% expense ratio can reduce it to below 9%. Vanguard’s famously low expense ratios are paramount for long-term wealth preservation.
- Invest in a Diversified Portfolio: The original 4% rule used only U.S. assets. Vanguard advocates for global diversification, recommending about 40% of stock allocation in international stocks and 30% of bond allocation in international bonds. Diversification significantly increases the chance of success, boosting a FIRE investor’s probability from 36% to 56%.
- Use a Dynamic Spending Strategy: Instead of fixed, inflation-adjusted withdrawals, a dynamic strategy allows retirees to spend more when markets perform well and cut back during downturns. This approach, while potentially reducing income stability, dramatically increases the long-term chance of success from 56% to 90% for a 50-year retirement horizon.
The Enduring Value for the Informed Investor
Whether you’re starting your investment journey, planning for early retirement, or navigating market shifts like the one predicted by Goldman Sachs, Vanguard S&P 500 ETFs offer robust solutions. While a concentrated market can bring both extraordinary gains and potential risks, the core principles of disciplined investing—low costs, diversification, and a long-term perspective—remain timeless.
For investors seeking a solid foundation, VOO continues to be a superb backbone for any portfolio, capturing the broad growth of the U.S. market. For those with a higher risk tolerance aiming for amplified growth, VOOG provides focused exposure to leading innovators. And for maximum diversification, funds like VTSAX offer an even wider net. By understanding these options and applying Vanguard’s proven principles, investors can confidently build a roadmap to financial independence and a secure retirement.
