If you don’t save well for retirement, you may end up struggling financially once you stop working. And after a decades-long career, you deserve better.
But funding an IRA or 401(k) is only part of the process. It’s important to invest your retirement savings wisely so that money is able to grow over time.
If you’re not sure how to do that, you may want to heed the advice of famed investor Warren Buffett. He suggests one specific investment for everyday people looking to build retirement wealth. And it’s advice worth taking to heart, albeit with a caveat.
There’s a reason people tend to take Buffett’s advice seriously — he’s one of the most successful investors of our time. And his advice for everyday savers is simple: Put money into a low-cost S&P 500 index fund, sit tight, and let it grow.
The S&P 500 index consists of the 500 largest publicly traded companies by market capitalization. This means you’re getting a bunch of established businesses across a range of market sectors.
What makes Buffett’s advice so applicable is that it achieves two important things:
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Simplification
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Diversification
Many people don’t have the time or mental energy to choose stocks individually for a retirement portfolio. An S&P 500 index fund simplifies things by letting you own a collection of different stocks with a single investment. And due to the nature of the S&P 500 index, you’re getting a nice amount of diversification.
Plus, the S&P 500 has a strong track record of rewarding investors who stick with it for the long haul. So if you invest in it for many years, there’s a good chance you’ll end up growing your money substantially.
Let’s say you put $300 a month into an S&P 500 index fund over a 40-year time period. Let’s also imagine that during that time, your portfolio earns a yearly 8% return, which is actually a bit below the index’s average yearly return.
If you stick to that plan, you could end up with almost $933,000 by the time you’re set to retire. But that $933,000 is coming to you at a cost of just $144,000 when you account for the money you’ve put into your retirement savings during those 40 years. That’s a pretty good return when you think about it that way , especially given that you’re not talking about a portfolio you have to actively manage and rebalance all the time.