Planning for retirement is essential for financial stability in later years. It’s not just about saving money because inflation can reduce its value over time.
To keep up with inflation and maintain buying power, strategic investing is crucial. Building a retirement fund is a long-term commitment. You need to regularly set aside money and let it grow until you retire.
But what should you invest in to ensure your savings grow effectively? I’ll discuss two Schwab ETFs that, in my opinion, are the only two you need to build a solid retirement fund.
This two-fund portfolio consists of SCHG and SCHD.
Schwab US Large-Cap Growth ETF ( SCHG )
High Growth Focus: SCHG invests in fast-growing, high-quality companies, achieving substantial gains in a healthy market despite a dividend yield of less than 0.5%.
Impressive Returns: Over the past year, SCHG has returned more than 35%, with a five-year annualized return of 20% and a ten-year return of 15.7%, outperforming the S&P 500.
Low Fees: Investors pay an expense ratio of just 0.04%, which translates to $40 annually on a $100,000 investment.
Portfolio Composition: The fund’s top 10 holdings, including Microsoft (12.2%), Apple (11%), and Nvidia (11%), make up nearly 60% of the portfolio, which includes 250 different stocks.
Risk Consideration: The heavy concentration in large-cap tech companies increases the fund’s risk, underscoring the need for diversification.
Schwab US Dividend Equity ETF (SCHD)
Increased Dividends: SCHD focuses on high-value, dividend-growing stocks with a current dividend yield of 3.4%, enhancing quarterly dividend payouts.
Low Fees: SCHD has an expense ratio of 0.06%, equating to $60 annually on a $100,000 investment.
Strong Holdings: SCHD includes fundamentally strong, dividend-paying companies like Texas Instruments, Pepsi, and Pfizer, achieving a steady return of 12% since inception with dividend reinvestment
Portfolio building stratergy
Two-fund portfolio: SCHG ( 60% ) + SCHD (40%)
This combination leverages the growth potential of SCHG while mitigating risk and enhancing dividend income with SCHD.
SCHG’s exposure to high-growth tech companies complements SCHD’s focus on value-oriented, high-dividend stocks, resulting in a total combined dividend yield close to 4%.
- Balanced Risk: Pairing SCHG with SCHD reduces the overall risk and volatility due to minimal overlap (only 2%) between the two funds.
- Strategic Diversification: Solely investing in SCHD may lead to underperformance compared to the broader market, as seen since January 2023 and over the past decade, highlighting the importance of combining SCHG for growth potential.
10 Years back testing result
Total invested amount: $120,000
Portfolio value at the end of 10 years: $280,528
Inflation adjusted return is $212,818.
Considering an average inflation rate of 3%, one should consider increasing the SIP amount by more than 3% to align with the desired final portfolio balance.
Max portfolio drawdown is 20% in 2022
- MWRR ( Money Weighted Rate of Return) is 15.6%
| Year | SIP Amount | Portfolio return | Balance | SCHD | SCHG |
|---|---|---|---|---|---|
| 2014 -July | $6,000 | 7% | $7,252 | 6% | 7% |
| 2015 | $12,000 | 2% | $19,431 | 0% | 3% |
| 2016 | $12,000 | 11% | $34,326 | 16% | 7% |
| 2017 | $12,000 | 25% | $56,337 | 21% | 28% |
| 2018 | $12,000 | -3% | $65,810 | -6% | -1% |
| 2019 | $12,000 | 33% | $100,610 | 27% | 36% |
| 2020 | $12,000 | 30% | $145,084 | 15% | 39% |
| 2021 | $12,000 | 29% | $200,374 | 30% | 28% |
| 2022 | $12,000 | -20% | $170,906 | -3% | -32% |
| 2023 | $12,000 | 32% | $239,024 | 5% | 50% |
| 2024-June | $6,000 | 15% | $280,528 | 4% | 22% |
Return forecast for Next 20 years
Projecting the annualized return of 15.6% for the next 20 years and considering an inflation rate of 3% which is adjusted in the portfolio end value
- Total invested amount: $240,000
- Portfolio value at the end of 20 years (inflation-adjusted): $984,481
You can consider increasing your investment every year by 3% or more to achieve higher returns.
| Year | Start Value | New Investment | Return | Gain | Inflation | End Value | Inflation Adjusted end value |
|---|---|---|---|---|---|---|---|
| 2025 | $- | $12,000 | 15.6% | $1,872 | 3% | $13,872 | $13,456 |
| 2026 | $13,456 | $12,000 | 15.6% | $3,971 | 3% | $29,427 | $28,544 |
| 2027 | $28,544 | $12,000 | 15.6% | $6,325 | 3% | $46,869 | $45,463 |
| 2028 | $45,463 | $12,000 | 15.6% | $8,964 | 3% | $66,427 | $64,434 |
| 2029 | $64,434 | $12,000 | 15.6% | $11,924 | 3% | $88,358 | $85,707 |
| 2030 | $85,707 | $12,000 | 15.6% | $15,242 | 3% | $112,950 | $109,561 |
| 2031 | $109,561 | $12,000 | 15.6% | $18,964 | 3% | $140,525 | $136,309 |
| 2032 | $136,309 | $12,000 | 15.6% | $23,136 | 3% | $171,445 | $166,302 |
| 2033 | $166,302 | $12,000 | 15.6% | $27,815 | 3% | $206,117 | $199,933 |
| 2034 | $199,933 | $12,000 | 15.6% | $33,062 | 3% | $244,995 | $237,645 |
| 2035 | $237,645 | $12,000 | 15.6% | $38,945 | 3% | $288,590 | $279,932 |
| 2036 | $279,932 | $12,000 | 15.6% | $45,541 | 3% | $337,474 | $327,349 |
| 2037 | $327,349 | $12,000 | 15.6% | $52,939 | 3% | $392,288 | $380,519 |
| 2038 | $380,519 | $12,000 | 15.6% | $61,233 | 3% | $453,752 | $440,140 |
| 2039 | $440,140 | $12,000 | 15.6% | $70,534 | 3% | $522,674 | $506,993 |
| 2040 | $506,993 | $12,000 | 15.6% | $80,963 | 3% | $599,956 | $581,958 |
| 2041 | $581,958 | $12,000 | 15.6% | $92,657 | 3% | $686,615 | $666,017 |
| 2042 | $666,017 | $12,000 | 15.6% | $105,771 | 3% | $783,787 | $760,274 |
| 2043 | $760,274 | $12,000 | 15.6% | $120,475 | 3% | $892,748 | $865,966 |
| 2044 | $865,966 | $12,000 | 15.6% | $136,963 | 3% | $1,014,928 | $984,481 |
Conclusion
Investing in SCHD and SCHG can be a strategic way to build a robust retirement portfolio. These ETFs offer a blend of high growth potential and reliable income, making them suitable for a wide range of investors. The minimal overlap between SCHD and SCHG ensures excellent diversification, reducing risk while enhancing returns.
By consistently investing $1,000 monthly in both SCHG and SCHD with a 60-40 split over 20 years, one can potentially build a corpus of one million dollars.
