the plan is to invest the money in an index fund that on average earns 5% and all dividends are reinvested. I believe 5% is very reasonable on S&P 500.

2% is a much safer estimate for S&P 500 dividend yields, as can be seen by this graph.

What value should I choose for Interest is compounded? Should it be Yearly?

For the kind of rough hypothetical that is this exercise, Yearly compounding is Good Enough.

This number seems quite high, is it correct?

This is the magic of compounding, which is why investing a little early is so much more important than investing a lot but later.

the plan is to invest the money in an index fund that on average earns 5% and all dividends are reinvested. I believe 5% is very reasonable on S&P 500.

Yes, 5% is a conservative estimate for the S&P 500.

What value should I choose for Interest is compounded? Should it be Yearly?

For the kind of rough hypothetical that is this exercise, Yearly compounding is Good Enough.

This number seems quite high, is it correct?

This is the magic of compounding, which is why investing a little early is so much more important than investing a lot but later.