Why Rich People Love This Simple Retirement Saving Strategy

How do wealthy Americans invest? You might think they pay advisors to invest their money in hedge funds, private equity, and things you've never even heard of.

In some cases, you'd be right. However, many rich investors use a strategy that's simple, effective, and cost-efficient.

It's a strategy that anyone can use. I'll show you how it works, what makes it so effective, and how you can get started.

A retirement strategy that can work for anyone

This strategy consists of three simple tactics:

• Dollar-cost averaging
• Using tax-advantaged accounts
• Investing in index funds

Let's go over the details.

Dollar-cost averaging

Dollar-cost averaging (DCA) simply means investing a fixed amount of money on a regular basis. For example, you might invest $500 every month. And if you put a portion of every paycheck into a 401(k), congratulations -- you're dollar-cost averaging.

But why does it work?

There are a couple of benefits to DCA:

1. Stock prices change, but the amount of money you invest doesn't. You'll buy more shares when prices are low and fewer shares when prices are high. That lowers your average cost per share.
2. It's simple and can be automated, so there's no stress or guesswork.

If you don't have a workplace retirement plan, you can open your own brokerage account and set up automatic investments. Which brings us to the next point…

Tax-advantaged accounts

Tax-advantaged accounts include 401(k)s, individual retirement accounts (IRAs), and health savings accounts (HSAs). Investments in these accounts are free from capital gains tax and dividend tax, which could save you huge sums of money.

They do come with some strings attached, though:

• If you withdraw funds from a 401(k) or IRA before age 59 1/2, you'll pay a penalty (with some exceptions).
• HSA funds can be used for medical expenses, but withdrawals for any other purpose will be hit with a penalty -- until you reach age 65. After that, you can use the funds for whatever you want, penalty-free.

The tax savings make the wait worthwhile. Say you've saved up $500,000 by the time you retire, and your capital gains tax rate would normally be 15%. Your tax-advantaged account could save you $75,000 or more, because the IRS can't take a share of your earnings.

Anybody who earns income can open an IRA. Want to pay $0 in taxes on your investment gains and dividends? Check out our list of the best stock brokers and open an account today.

Index funds

An index fund mirrors the returns of a stock market index by investing in many companies at once. So if you buy a share of an S&P 500 Index fund, for example, then you own a piece of 500 of the biggest companies in the U.S.

There are several reasons to love index funds:

• You're instantly diversified. You won't lose your shirt if a handful of stocks tank.
• Index funds charge very low fees.
• You don't have to pick individual stocks.

Some index funds have delivered consistent long-term gains, too. The S&P 500 has gained an average of 10% per year over the past several decades.

It's savvy and simple

This strategy boils down to this: Make regular, automatic investments in index funds through a tax-advantaged account. Just like that, you'll be investing smarter than most retirement savers.

This strategy has made a lot of people wealthy, and it doesn't require high-priced advisors, tricky tax-avoidance schemes, or insider stock tips. I've invested this way for the last 13 years, and I'm on track to retire early.

You don't need a fortune to get started. You can open an IRA for free and start investing $50 a month, $100 a month, or whatever fits your budget. The most important thing is to start now and keep at it for decades. Even if you don't end up rich, odds are you'll be a whole lot richer.