If you don't save well for retirement, you may end up struggling financially once you stop working. And after a decades-long career, you deserve better.
But funding an IRA or 401(k) is only part of the process. It's important to invest your retirement savings wisely so that money is able to grow over time.
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If you're not sure how to do that, you may want to heed the advice of famed investor Warren Buffett. He suggests one specific investment for everyday people looking to build retirement wealth. And it's advice worth taking to heart, albeit with a caveat.
Buffett's broad suggestion
There's a reason people tend to take Buffett's advice seriously -- he's one of the most successful investors of our time. And his advice for everyday savers is simple: Put money into a low-cost S&P 500 index fund, sit tight, and let it grow.
The S&P 500 index consists of the 500 largest publicly traded companies by market capitalization. This means you're getting a bunch of established businesses across a range of market sectors.
What makes Buffett's advice so applicable is that it achieves two important things:
- Simplification
- Diversification
Many people don't have the time or mental energy to choose stocks individually for a retirement portfolio. An S&P 500 index fund simplifies things by letting you own a collection of different stocks with a single investment. And due to the nature of the S&P 500 index, you're getting a nice amount of diversification.
Plus, the S&P 500 has a strong track record of rewarding investors who stick with it for the long haul. So if you invest in it for many years, there's a good chance you'll end up growing your money substantially.
Let's say you put $300 a month into an S&P 500 index fund over a 40-year time period. Let's also imagine that during that time, your portfolio earns a yearly 8% return, which is actually a bit below the index's average yearly return.
If you stick to that plan, you could end up with almost $933,000 by the time you're set to retire. But that $933,000 is coming to you at a cost of just $144,000 when you account for the money you've put into your retirement savings during those 40 years. That's a pretty good return when you think about it that way , especially given that you're not talking about a portfolio you have to actively manage and rebalance all the time.
The one drawback of following Buffett's advice
While Buffett's advice is worth considering, you should know that there's one big drawback. Investing in an S&P 500 index fund won't help you beat the market. If that's a goal of yours, then you may need to look at individual stocks or choose the right actively managed funds.
Also, you should know that investing in the S&P 500 carries risk. The stock market can be very volatile, so while going all-in on an S&P 500 index fund makes sense for your wealth-building years, you may want to scale back once you're close to or in retirement.
Also, the S&P 500, by nature, excludes smaller companies as well as international markets. By sticking to an S&P 500 index fund, you could end up missing out on a lot of upside.
But all told, for the typical investor who doesn't want to sink a lot of time into building a portfolio, Buffett's advice is pretty hard to argue with. And while you may want to load up on additional assets, it's certainly not a bad idea to put at least some money into an S&P 500 index fund like Buffett suggests.
