Warren Buffett's Super-Simple Retirement Advice

"You see, Barack, my advice is pretty clear."

Warren Buffett might as well be king of the investment industry. He produced the best returns the world has ever seen working from his house in Omaha, not a desk on Wall Street.

And for that reason, so many people want his advice on how to invest for retirement. They want to hear from someone like them -- someone who doesn't spend every waking moment in Manhattan.

What would Buffett do?
At the 2004 Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) shareholders meeting, Buffett was asked by one investor if he should buy Berkshire, invest in an index fund, or hire a broker.

Buffett delivered with his typical, common-sense rationale:

"We never recommend buying or selling Berkshire. Among the various propositions offered to you, if you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."

An index fund? That's what the best stock picker in the world recommends?

Yes, and it wasn't the first time he answered with such simplicity. In another question-and-answer session, Buffett made his stance plain and clear:

"If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things."

So, let's get to the specifics. What's Buffett's favorite index fund?

"Just pick a broad index like the S&P 500. Don't put your money in all at once; do it over a period of time. I recommend John Bogle's books -- any investor in funds should read them. They have all you need to know.

Vanguard. Reliable, low cost. If you're not professional, you are thus an amateur. [F]orget it and go back to work."

Why is Buffett so keen on index funds? They're cheap. In fact, Vanguard's S&P 500 ETF (NYSEMKT: VOO  )  provides a way for investors to own a slice of 500 of the largest businesses traded on the public stock markets, including Berkshire Hathaway, at a cost of just 0.05% per year. On a $100,000 investment, fees would tally to only $50 per year, compared to $1,310 for the average large-cap mutual fund.

Over time, lower fees and expenses help your money compound faster. Just look how Vanguard's low-cost ETFs stack up to the alternatives:

Add in Vanguard's other popular ETFs, like its Vanguard FTSE All-World ex-US ETF (NYSEMKT: VEU  ) fund, which tracks international stocks, and its Vanguard Total Bond Market ETF (NYSEMKT: BND  ) for bond exposure, and you'll have a more balanced investment portfolio than many who hire the help of a broker.

Avoid this big mistake
Buffett's pretty keen on helping people avoid big mistakes, just as he's all for helping investors make better decisions. Saying it as simply as he could, he opined on how having cash is one of the worst investments you could ever make:

The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. 

Of course, that's not to say that having a cash buffer for emergencies is a bad thing. However, having piles of cash -- tens upon tens of thousands of dollars in cash -- is a great way to guarantee a terrible return on a very large pile of money. 

More thoughtful insights from the Oracle of Omaha
Warren Buffett has shared wisdom worth billions in his annual letters to Berkshire shareholders. Luckily, his smarts are free for the taking. You can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2013, at 9:02 AM, setupforsuccess wrote:

    I have a simple question! I have recieved settlement in the amount of 50k.My wife and I are wanting to use it to make a little more by investing.Does anyone have any advice on how to increase our chances of succesfully investing our money?I am not an investment whiz but am familiar somewhat.Thanks for ANY advice yall may have!Thanks in advance!

  • Report this Comment On December 30, 2013, at 9:17 AM, LittleBear wrote:

    Follow Buffet's advice - invest in an index fund from Vanguard.

  • Report this Comment On December 30, 2013, at 9:31 AM, vasco42 wrote:

    setupforsuccess: isn't this article the answer to your question?

  • Report this Comment On December 30, 2013, at 9:40 AM, tchams wrote:

    My first advice is to make sure to keep enough cash to pay the taxes on that 50k, because many forget about that and do not have the cash to pay the IRS.

    I am an amateur so I will not offer any more advice than that.

    Best of luck to you!

  • Report this Comment On December 30, 2013, at 9:54 AM, captaindune wrote:

    If u hold forever, per Buffett when do u get ur $$.

  • Report this Comment On December 30, 2013, at 9:58 AM, Kidron02 wrote:

    1st, if this money is from a settlement, you most likely do no owe any tax on it, consult someone who knows.

    2nd, follow the advice in the article, but notice that the advise is to average it in over time, do not dump it in all is the same day, month, or even quarter.

  • Report this Comment On December 30, 2013, at 10:44 AM, kmiao1 wrote:

    Setupforsuccess: Go to your library and borrow the book: The little book of common sense investing by Bogle, and read it cover to cover. He'll set out some guidance for investing. You might also want to look at the Gone Fishing Portfolio book by Alexander Green, who lists the Vanguard funds to buy for a decent asset allocation. You just rebalance once a year to get to your original target asset allocation.

    If you are concerned about buying at a top, consider investing 40% and then the remainder over 2 more years (30% each year or divy it up quarterly to average into the market). But if you just want to set it and forget it (other than the annual rebalance) then buy into it at once. Over time, the purchase price may not matter as much if the market is going up.

    Good luck on your journey!

  • Report this Comment On December 30, 2013, at 11:20 AM, deepestvalue wrote:

    How would one compare the S&P 500 with Berkshire Hathaway over the next 10 years ?

    Warren Buffett picks from the top 10% of the S&P 500 and his batting average (correct picks over the next 10 years) is 99%

    BRK.A and BRK.B will outperform the Index by at least a small margin and possibly by a huge margin over the next 10 years.

    I am completely comfortable with Buffett's succession plans starting with his 'Yesterday I died' letter. Howard becoming the non executive chairman,Ted and Todd (or either) becoming the Chief Investment Officer & theCEO being chosen from Berkshire's deep bench of world class CEOs each with a value bent.

    Hope and pray the W.E.B. will be around forever but as he said, its not going to be another 450 years that he remains CEO

  • Report this Comment On December 30, 2013, at 11:32 AM, pondee619 wrote:

    So, are we finally done with the constant barrage of fool articles about investing like Buffett?

  • Report this Comment On December 30, 2013, at 11:34 AM, freethought1 wrote:

    I am getting about $100,000.00 from my father's estate. I owe about $100,000.00 on my house with about 13 years left on mortgage. My wife and I are both 57 and hope to retire in less than 10 years, Should I pay off my home or invest?

  • Report this Comment On December 30, 2013, at 11:49 AM, mdk0611 wrote:

    Freethought - Why limit yourself to one or another? You can prepay part and invest part. The percentages would depend on your personal circumstances (beyond merely age).

  • Report this Comment On December 30, 2013, at 12:29 PM, crawlfish wrote:

    @Freethought1

    I will shortly have a similar situation in two years at retirement. There are two ways to look at this. One is the interest rate on your loan. Is it lower that what you could earn on the same amount of money invested conservatively. The other way is what amount of money could safely generate the same income of money that your mortgage cost. These should tell you what is best for you.

  • Report this Comment On December 30, 2013, at 12:50 PM, pondee619 wrote:

    Payoff your mortgage and use the monthly payments, that are now NOT being made, to dollar cost average into an index fund. You save the cost of your martgage, free yourself of the "obligation" to make the monthly payments to someonje else, your mortgage company, reap the time divesification of dollar cost averaging and still have flexibility should something extraordinary come along requiring the use of that payment. Win-win-win..

  • Report this Comment On December 30, 2013, at 3:46 PM, mortmain wrote:

    Get into politics and cut deals with rich people.

  • Report this Comment On December 30, 2013, at 5:31 PM, y4money wrote:

    Agree with Pondee619 advise: it is a real win win situation for you....

  • Report this Comment On December 30, 2013, at 5:36 PM, shoemaker17 wrote:

    I own ishares S&P 500 index fund(IVV). Anytime it drops 1%, I buy $1,000 worth. If it drops 2%, $2,000 worth, and so on. It's worked pretty well for me so far. I also own a bunch of BRK.B. In my opinion, what goes down must go up...over time.

  • Report this Comment On December 30, 2013, at 5:39 PM, cmalek wrote:

    @Freethought1:

    I agree with crawfish. The answer depends on the interest rate and the term of the loan. With 13 years to go on a 15 year mortgare your monthly payment would still be mostly interest With 13 years to go on a 30 year mortgage, much of your interest is already paid and now you are repaying the principle. Do not forget that mortgage interest is tax deductible on Schedule A. If you have the shorter term mortgage, the interestest deduction is much higher at this point than one on the longer term mortgage.

  • Report this Comment On December 30, 2013, at 5:45 PM, BahoPuwet wrote:

    On a recent discussion on Bloomberg TV:

    After some back & forth, one prominent guest said to the panel of professional investors, wealth managers, etc....

    "Well, does not matter if the market cycling up or down. You guys always try to sell something regardless of market condition."

    Panel & host kept quiet for about 5 seconds until the host realized she had to say something (for the sake of saying something) - LoL

  • Report this Comment On December 30, 2013, at 5:47 PM, thunderboltnova wrote:

    The problem with an index fund is it's too easy to sell when the going gets tough. The average person would be better off owning individual stocks in companies. During the Financial Crisis I was very tempted to sell everything but the paperwork behind all of my stocks would have been a nightmare. So I kept them and here we are.

  • Report this Comment On December 30, 2013, at 5:48 PM, cmalek wrote:

    @shoemaker17:

    "In my opinion, what goes down must go up...over time."

    Only if you're talking S&P 500 or BRK.A/BRK.B. Not if you're talking Eastman Kodak, JC Penny, Sears, US Steel, AOL At one time or another they all were blue chips.

  • Report this Comment On December 30, 2013, at 5:51 PM, shoemaker17 wrote:

    Cmalek:

    Of course I'm talking about the S&P 500 or BRK.B. I'm not an idiot...

  • Report this Comment On December 30, 2013, at 5:55 PM, thunderboltnova wrote:

    Always remember how Warren got rich with buying stocks and not mutual or index funds. The index fund just bought Facebook at $57. I really doubt Warren would have done that. He stays far away from anything related to technology and tries to find companies which are undervalued.

  • Report this Comment On December 30, 2013, at 6:16 PM, MaximusShred wrote:

    You only have one life, so trust yourself, commit to do a little research, grasp the nettle and invest 10% in say 10 different companies and each month continue to do likewise, regardless of the markets going up or down. Over 12 months you will see how well or badly you have done and you may then want to reduce or increase your holdings

  • Report this Comment On December 30, 2013, at 6:37 PM, zbicyclist wrote:

    Yes, thunderboltnova, WARREN got rich buying stocks and not mutual or index funds. Warren also is a professional investor. I'm not. I also willingly concede Warren is smarter than I am, at least in terms of investing.

    I started buying Vanguard index funds 20+ years ago, a specific dollar amount every month automatically deducted from my checking account. Also some from TRPrice. This was a good strategy for me, and I retired early (voluntarily) earlier this year.

  • Report this Comment On December 30, 2013, at 6:41 PM, AnsgarJohn wrote:

    This drives me nuts. For idiots Buffett recommends the S&P 500, for others who take 5 minutes he recommends buying Berkshire Hathaway if it is trading at around 1,2 x book value or less. Read Buffett's speech "Superinvestors of Graham and Doddsville" to see what he really thinks. Check the performance of stockscreens and or CAPS game players here at Fool.com who have a score over 99% and choose the system that best fits your personality.

  • Report this Comment On December 30, 2013, at 8:40 PM, dbtheonly wrote:

    cmalek,

    Don't forget the mortgage escrows for taxes & insurance. Those bills will now come to you if the mortgage is paid off.

  • Report this Comment On December 30, 2013, at 8:42 PM, BahoPuwet wrote:

    My point was = be careful with brokers, Financial Consultants, Wealth Mgrs, and the likes:

    - They'll sell you anything regardless of market conditions;

    - Be careful with the ones only emphasizing flowery returns

  • Report this Comment On December 30, 2013, at 9:34 PM, bubbajog wrote:

    Any opinions regarding index funds vs target date retirement funds.

  • Report this Comment On December 30, 2013, at 10:08 PM, profits4fun wrote:

    Read up on investing before you begin to invest... Then start investing... Slowly.... You are the best person to invest your own money. No one else has the same motivation to succeed with your money as you do. If you don't have the time to learn how to invest for yourself, give the money to your favorite charity because money isn't a priority to you and it will do a lot of good for others.

  • Report this Comment On December 30, 2013, at 10:10 PM, teddylevy wrote:

    Yes Bubba....anything actively managed is guaranteed over a normal investment horizon of years to underperform index funds. If you want to gear your index funds for retirement, just allocate between stock and bond funds at your desired percentage based on your age.

  • Report this Comment On December 30, 2013, at 10:33 PM, kevinking wrote:

    Setupforsuccess...you have to follow that simple advice and invest in dividend stock...if you wanna widen your horizon...i will advice you to look into developing nations...as their economy is really expanding...and lots of opportunities there...I do trade currency, gold and oil...but it is highly risky that you need lots of experience to trade on it. No matter what...investing involves risk and it is only when you understand those risk that you will be able to manage them.

  • Report this Comment On December 30, 2013, at 11:04 PM, loolooland wrote:

    Does Buffett ever mention another part of good advice (own companies that get bailed out on the tax payer dime) Well Fargo ring a bell? How about his other holding that are determined in value by the artificially depressed interest rates. Where is Moody's in their ratings on the MBS? Had Buffett been forced to compete with the free market on his positions he would seem much more common. WF would have devastated his portfolio by itself. With no tax payer FR banking system. Kind of wierd how he is a cheerleader for dollar destruction. Go ahead an keep on worshiping him. His advice about invest over time in a low cost etf SPR is 1st grade common sence.

  • Report this Comment On December 31, 2013, at 12:36 AM, john795806 wrote:

    The premise of this article is faulty. Buffett was asked a general question about where to invest--NOT A QUESTION ON HOW TO INVEST FOR RETIREMENT! It is a huge mistake by the author Jordan Wathen to assume that the two are the same--Jordan, how did you make this incredible leap? An index fund is a GREAT long-term investment, when your time horizon is 20 years or so, because you are putting money into it--not taking money out, as you are in retirement. Once you retire, things change. It is very risky to be "all in" in an index fund, which occasionally stagnates for a decade, or takes a big hit, just like the one we witnessed some 6-8 years ago. If you are eating into your retirement savings while the market is bottoming out or stagnating, you are in one hell of a mess--and so much the worse if after 2-3 years of watching your life savings plummet, you panic and sell, and miss a bounce that might be months or years down the line.

    Retirement savings is largely about risk aversion--getting a reliable income so you can enjoy your life without watching the market every day. THIS IS NOT WHAT INVESTING IN AN INDEX FUND OFFERS. Index funds are not the solution for retirement, as the article insinuates. They are a great long-term investment before retirement only.

  • Report this Comment On December 31, 2013, at 6:43 AM, cplca wrote:

    I would personally do 4 things.

    First I would clear my mortgage.

    Than I would make a new mortgage to myself to be

    paid off the same month I would retire.

    So, let say $100.000.oo for 120 months at an interest rate comparable to your current payment.

    Third, I would take the amount going towards you Interest and purchase physical Gold and Silver.

    Than I would invest the amount going towards your Capital. If I knew my job to be safe until I retire, it is probably the first place I would look to invest. Otherwise Buffet's idea isn't a bad one but

    I would also look at investing into my local community as much as possible.

    That way if needed, your funds and most of your investments are still available in very short notice.

    In Five years form now I would re assess my Capital versus Interest strategy and go from there.

  • Report this Comment On December 31, 2013, at 11:34 AM, RecognizedExpert wrote:

    john795806 is correct. Index funds are great while you are accumulating funds. Not so great if you are retired and living off your investments. For that, you need to focus on low-cost portfolio income.

    teddylevy is right about target date funds. They take 1% to 2% or more of your money every single year to do something you could do yourself... periodically adjust your allocation between stocks and bonds using passive ETFs. They also assume you will be working until you are 65, which is not necessarily true if you invest properly.

    I find it hilarious that after reading the advice of none other than Warren Buffett, some feel the need to seek competing advice from completely unknown strangers.

  • Report this Comment On December 31, 2013, at 12:42 PM, azmouse wrote:

    Mr. Buffet is full of advice but if you work for him you can't afford to save for retirement. He owns GEICO, I applied for a job as a legal secretary. Got the job but they only could offer $33,000 per year. I have 20 years' experience, and that's a $23,000 pay cut. Couldn't take the job and afford the gas to get to work. THAT'S why he's rich. He pays slave wages.

  • Report this Comment On December 31, 2013, at 1:04 PM, banmate7 wrote:

    This article is spot on. Buffett is absolutely correct in suggesting dollar cost averaging into index funds for most investors. Any 20 year period of history has featured 9% average annual gains in the S&P500, so the advantages of investing early should be obvious here.

    However, if you do have the time & inclination, value investing in individual stocks is much superior. There are excellent tools and sources with which to do this successfully. It takes high school arithmetic, discipline, and time...but the rewards are worth it.

    Best of luck.

  • Report this Comment On December 31, 2013, at 6:39 PM, chieftp wrote:

    buffet is in his 80s, is a multibillionaire and still hasn't retired yet.

  • Report this Comment On January 03, 2014, at 3:42 PM, cmalek wrote:

    @dbtheonly:

    "Don't forget the mortgage escrows for taxes & insurance. Those bills will now come to you if the mortgage is paid off."

    Taxes/insurance come out of your pocket no matter what. You pay into the escrow account while you are still paying off a mortgage. After you pay off the mortgage, you pay directly.

    The benefit of paying directly is that you can keep the money in some kind of an investment account until it is needed. Another benefit of paying directly is that, at the end of the year, you do not get a letter from your lender telling you that "the escrow account is short $200, $300, $400 or more, please remit or we will lend it that amount to you at some usurious rate."

  • Report this Comment On November 05, 2014, at 5:03 PM, xiryjuli wrote:

    1) Don't be foolish and fall into the trap of trying to measure your wealth by the value of your assets. Markets change. Valuations fluctuate. Instead, measure your wealth by the amount of cash flow your assets consistently generate.

    2) Pay off your debts as fast as you possibly can. If this means living in a crappy studio apartment and eating ramen everyday for a couple of years, do it. If you want to buy a car, get a reliable beater. Get insurance for $25/month from 4AutoInsuranceQuote. Forget about buying a house until your debts are paid off.

    3) Once you are out of debt, stay out of debt. The only exception to this rule is a vehicle and a house. If you want to get a nicer car, buy used and be able to pay it off in a year or 2.

    4) If you are going to stay in the same spot for at least 10 years, buy a house, preferably with at least a little bit of usable land. An acre is good, 5 acres is better. Take the amount you are pre-approved for and cut it in half - that's how much you should spend on a house. Come to the table with at least 20% down and make a couple of extra mortgage payments every year. If you're going to be transferred or relocate every 5 years, forget about buying a house and rent instead.

    5) Develop multiple revenue streams. Do contract work. Start a business on the side. Invest in a business as a silent partner. Raise chickens, breed dogs or grow apples. Build websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Do whatever you can to generate income from multiple sources.

    6) Grow these multiple revenue streams to the point that they generate enough consistent and reliable cash flow to replace your current income.

    7) Make as much as you can. Save as much as you can. Give away as much as you can.

    8) Retire!- the sooner, the better. Be sure you understand that "retirement" doesn't necessarily mean you stop working, it just means having the freedom to do what you want to do, when you want to do it.

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