If you know you should be saving and investing for retirement, but you don't know where to start, perhaps take some advice from one of the world's greatest investors. Warren Buffett has increased the value of his company, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), by 5,500,000% (nearly 20% annually) over 60 years. In contrast, the S&P 500 index of 500 of America's biggest companies gained about 39,000% (10.4% annually, on average).
You might want to invest in some shares of Berkshire Hathaway itself, as it has been built to last. But Buffett has recommended a different investment for most people.
Image source: The Motley Fool.
What does Warren Buffett recommend?
In his 2013 letter to shareholders, Buffett explained how he has directed his money to be invested for his wife, after his death. (Buffett turns 95 in August.) He wrote:
One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions or individuals -- who employ high-fee managers.
That's right: Buffett is a big fan of simple, low-fee, broad-market index funds for most investors. He knows, after all, that most of us are not skilled stock analysts with appropriate investing temperaments.
Buffett is such a strong believer in the power of broad index funds that he put his money where his mouth is, entering into a 10-year, million-dollar bet in 2008 favoring index funds over hedge funds. He won the bet, of course.
Why an S&P 500 index fund? And which one?
There are many reasons to favor index funds. For example:
- Low fees: The best index funds sport extremely low expense ratios (annual fees) -- in part because managers don't have to spend time studying the universe of investments and selecting when to buy or sell which ones. Instead, they just buy all or most of the securities in the index they track. An expense ratio of, say, 0.03% means you'll pay $3 per year for every $10,000 you have invested in the fund.
- Diversification: Buy into an S&P 500 index fund and you'll immediately have your money spread across hundreds of America's biggest and best companies.
- Ease: If you buy into an index fund in exchange-traded fund (ETF) form, you'll simply buy shares like shares of stock, typically via your brokerage or retirement account.
- Outperformance: Index funds are no slouches when it comes to performance, either. According to the folks at S&P Dow Jones Indices, over the past 15 years, the S&P 500 index outperformed a whopping 89.5% of managed large-cap mutual funds, and it outperformed 84.3% over the past decade.
The S&P 500 has averaged annual returns close to 10% (ignoring inflation) over long periods, and the past few years have featured higher-than-average returns.) So the table below shows how you might amass a fortune by investing $1,000 per month -- $12,000 per year -- over some long periods. I'm including several possible growth rates, too:
|
Investing $12,000 annually for |
Growing at 8% annually |
Growing at 10% annually |
Growing at 12% annually |
|---|---|---|---|
|
5 years |
$76,032 |
$80,587 |
$85,382 |
|
10 years |
$187,746 |
$210,374 |
$235,855 |
|
15 years |
$351,892 |
$419,397 |
$501,039 |
|
20 years |
$593,076 |
$756,030 |
$968,385 |
|
25 years |
$947,452 |
$1,298,181 |
$1,792,007 |
|
30 years |
$1,468,150 |
$2,171,321 |
$3,243,511 |
|
35 years |
$2,233,226 |
$3,577,522 |
$5,801,557 |
|
40 years |
$3,357,372 |
$5,842,222 |
$10,309,707 |
Calculations by author via moneychimp.com.
So which index fund(s) should you invest in? Well, you might just choose Vanguard's S&P 500 fund, as Buffett suggested. But you might, instead of or in addition to that, opt for an even broader index. Here are three funds to consider:
|
ETF |
Expense Ratio |
5-Year Avg. Annual Return |
10-Year Avg. Annual Return |
|---|---|---|---|
|
Vanguard S&P 500 ETF (VOO 1.10%) |
0.03% |
15.77% |
12.95% |
|
Vanguard Total Stock Market ETF (VTI 1.20%) |
0.03% |
15.07% |
12.24% |
|
Vanguard Total World Stock ETF (VT 1.26%) |
0.06% |
12.94% |
9.43% |
Data source: Morningstar.com, as of June 18, 2025.
Here's how broad these funds are:
- Vanguard S&P 500 ETF: S&P 500 index funds encompass 500 of the biggest companies in America, which together make up around 80% of the entire U.S. market.
- Vanguard Total Stock Market ETF: This ETF includes nearly all of the U.S. stock market, spreading your money across more than 3,500 stocks, not just 500. It includes lots of small companies, too.
- Vanguard Total World Stock ETF: This ETF encompasses roughly all the stocks in the world -- more than 9,700 stocks -- all in one easy, low-fee investment.
However you go about it, be sure you have a solid retirement plan in place and that you're executing it. Know that the average monthly Social Security benefit was just $2,002 as of May, which is about $24,000 for the year. Most of us will need to set up more income than that for our futures.
