We live in an age where many workers aren't privy to a job-related pension that guarantees a certain amount of retirement income. As such, it's on us to save on our own so we're able to live comfortably and supplement our Social Security.
But saving for retirement isn't enough. Because inflation has the potential to erode the value of money today, you need to invest your retirement savings in a manner that's likely to fuel its growth.
Image source: Getty Images.
In that regard, you have choices. You could assemble a portfolio of carefully vetted stocks, or you could put your money into the broad market instead.
If you're a shrewd investor with years of experience, by all means, choose the former. But if that isn't the case, you should know that simply going all-in on the S&P 500 index could be your ticket to the retirement of your dreams.
Why it pays to invest in the broad market
Any time you buy shares of an individual stock, you run the risk of those shares losing value. Now to be clear, the S&P 500 as a whole can most certainly lose value, too. But the S&P 500 is less likely to be affected by poor performance on the part of a single company, since it's comprised of roughly 500 different ones. That could make it a safer bet for your retirement portfolio.
In fact, as a general rule, it's important to maintain a diversified mix of stocks to protect yourself from losses and, ideally, perpetuate growth. And frankly, it's hard to get more diverse than the 500 largest publicly traded companies, which span a range of industries.
Over the past 50 years, the S&P 500 index has rewarded investors with an average annual 10% return. This doesn't mean that every year has been stellar -- rather, this figure accounts for years of strong performance and downturns alike.
But if you were to put $500 a month into an S&P 500 index fund, even if you were to end up with a slightly lower return -- say, 8% -- you could still end up with a little over $1.5 million after 40 years. And while a portfolio of hand-picked stocks might easily outperform the S&P 500, you'll need to ask yourself if you really want to take on that risk.
A strategy even stock-picking experts recommend
An S&P 500 index fund could lead to a lot of retirement wealth. If you're still not quite convinced, consider that investing great Warren Buffett has long recommended that individual investors fall back on the S&P 500 to grow their nest eggs. And this is coming from someone who's grown billions in wealth by choosing specific investments.
Buffett's logic works, though, because it really does take a lot of the guesswork out of retirement investing -- and that's an important thing.
It's stressful enough knowing that it's on you to build retirement savings in the absence of a pension, and that the amount of money you'll end up with will hinge largely on the way your portfolio performs. So why pile on by forcing yourself to commit to a few dozen specific stocks that may or may not outperform the broad market? Instead, it could very much pay to fall back on the S&P 500 -- not just for the financial upside, but for the peace of mind.
