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Could Index Funds Be the Ticket to Your Dream Retirement?

By Maurie Backman - Jun 6, 2021 at 5:18AM

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Here's why it pays to focus on index funds in the course of saving and planning for your senior years.

When you picture yourself in retirement, what does that look like? Are you spending your days gardening, visiting your grandchildren, and mingling with members of your book club? Or do you see yourself traveling the world and exploring different cultures?

No matter what your ideal retirement looks like, it'll take money to pull it off. And while Social Security will provide you with some income, you'll need to save and invest independently to boost your cash reserves for your senior years.

But how exactly should you invest your retirement savings? There are different routes you can take, but here's why index funds are a solid bet.

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Image source: Getty Images.

The upside of index funds

Index funds are passively managed funds that aim to match the performance of the various market indexes they're associated with. If you buy an S&P 500 index fund, for example, the goal of that fund will be to achieve roughly the same performance as the S&P 500 index itself, which is comprised of the 500 largest publicly traded companies.

There are a number of good reasons to put your retirement savings into index funds, but the primary benefits are:

  • Instant diversification
  • Low fees
  • Little legwork

Let's unpack each perk individually.

A diverse investment portfolio could not only protect you during market downturns, but also lend to higher returns in your retirement plan. The great thing about index funds is that they let you own a bunch of different stocks with a single investment, so you get that diversification.

Index funds are also known to charge very low fees because unlike actively managed mutual funds, they don't employ fund managers to select stocks individually. Instead, they simply follow market indexes that already exist.

Finally, index funds don't require nearly the same research as it takes to buy individual stocks. Granted, you shouldn't pick index funds blindly. Rather, you should research your options and see what fees various funds charge, and what their performance looks like in recent years as well since each fund's inception.

But researching index funds takes a lot less than time than digging into different companies' financials to determine whether they're worth investing in. Besides, if you're saving for retirement in a 401(k), you'll be limited to funds anyway -- those plans generally don't allow you to invest in individual stocks.

Your ticket to retirement wealth

How much money might you accumulate by investing in index funds? Let's say you're able to save and invest $400 a month over 40 years. If the index funds you choose generate an average annual 8% return (which is several percentage points below what the S&P 500 has delivered over the past 30 years), then you'll wind up with about $1.24 million. And that's not too shabby at all.

Though you don't have to limit yourself to index funds in the course of investing for retirement, they're a solid option to look into, especially if you don't know a ton about the stock market and aren't particularly eager to learn. Loading up on index funds could help you close out your career with a lot of money. And that, in turn, could pave the way to the fulfilling retirement you've always imagined.

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