You'll often hear that to retire comfortably, you can't fall back on Social Security alone. And there's a lot of truth to that. The average senior today on Social Security collects about $18,500 a year, which doesn't offer a lot of financial flexibility.
It's for this reason that saving and investing for retirement on your own is crucial. But what if you don't know a thing about investing? How are you supposed to assemble a solid portfolio to sustain you throughout your senior years if you're largely in the dark about buying stocks?
It's a predicament a lot of people face. But here's some good news: You can actually invest quite efficiently for retirement without knowing all that much about the stock market. All you really need to do is buy index funds that follow the S&P 500.
What are index funds?
Index funds are passively managed funds that aim to match the performance of the market indexes they're associated with. You'll generally have the option to put your money into index funds whether you're housing your savings in an IRA or a 401(k) plan through your employer.
What is the S&P 500?
The S&P 500 is a market index made up of the 500 largest publicly traded companies. Some of those companies have been around for 100 years or longer. Due to its size, the S&P 500 is a strong measure of how the broad stock market is performing. And the index itself has a solid history of excellent performance, due in part to the fact that it's so diverse.
Over the past 30 years, the S&P 500 has delivered an average annual return of close to 11%. Now that doesn't mean that the S&P 500 performs well every year. From 2000 through 2002, for example, it had a negative return. The same happened in 2008. But over time, the index has not only delivered a positive return, but a strong one.
A winning combination
Let's say you're able to save $500 a month for retirement over a 30-year period. If you were to invest in S&P 500 index funds that deliver a 10% return, which is a bit below the index's average, you'd wind up with about $987,000 for retirement. And kicking off your senior years with close to $1 million on hand is a good way to buy yourself some long-term financial security.
Plus, that assumes you only have a 30-year investing window ahead of you. If you're in your late 20s and don't plan to retire until you're almost 70, that gives you 40 years to build wealth. And if you sock away $500 for four decades at an average annual 10% return, you'll end up with about $2.65 million.
Of course, you don't have to only use S&P 500 index funds to invest for retirement. But if you want an easy way to grow wealth for your senior years, they're a good bet to consider. Another great thing about index funds is that generally speaking, they charge very low fees, so you don't have to worry about those fees digging heavily into your returns.
And if the idea of investing intimidates you, S&P 500 index funds are a great way to shed those fears. After all, you'll be relying on an index that, at least so far, hasn't let investors down.