It's important to do your best to fund a retirement plan consistently throughout your career. If you don't make an effort to save for retirement, you might end up heavily reliant on Social Security during your senior years. That could prove problematic, since retirees commonly need more income than what those benefits provide to live comfortably.
And also, the notion of Social Security cuts isn't just a rumor. Rather, it's a distinct possibility based on the program's pending financial shortfall. So it's important to go into retirement with cash reserves of your own.
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But let's say you are making regular contributions to an IRA or 401(k) plan. That's good, but it's not good enough. You'll also want to invest that money so that it's able to grow into a larger sum over time.
Investing for your retirement can be daunting, though, if you're fairly clueless about how to do it. And if you're in that boat, you're also not alone.
But there's an easy approach you can take to retirement investing that could help you meet your financial goals. And it doesn't require a ton of investing knowledge at all.
Fall back on the broad market
Some people spend loads of time assembling investment portfolios of hand-picked stocks. This is by no means a bad idea if you have the time, patience, and skills for it.
But what if you really don't know much about investing and find the idea of learning overwhelming? If you'd rather take the easy way out, that's really OK.
Instead of loading your portfolio with individual stocks, you can instead put your long-term savings into S&P 500 index funds. Index funds are passively managed, and their goal is to match the performance of the benchmarks they're tied to. So when you invest your retirement funds in the S&P 500 index, you're effectively investing in the broad market.
Now between 2012 and 2021, the average annual return for the S&P 500 index was close to 15% That's not necessarily the return you're guaranteed to get from your savings, and you should also know that the index's return over the past 50 years has been lower than what it was from 2012 to 2021.
But let's say you pump $300 a month into your retirement plan and score a 10% average annual return over 40 years by loading up on S&P 500 index funds. At the end of the day, you'll be sitting on almost $1.6 million. That's not a bad balance at all for someone who doesn't know how to invest!
It's OK to take the easy way out
Filling your portfolio with S&P 500 index funds won't let you beat the broad market. But if you're OK with that, then there's absolutely nothing wrong with taking the easy way out.
Investing in the S&P 500 is an effective means of growing wealth. So if it works for you, don't knock it -- especially if it spares you the stress of having to become a self-taught investor when that's not something you're particularly interested in.
