The money you contribute diligently each month to your retirement savings shouldn't just sit in cash. You need that money to grow so you end up with enough income to live comfortably and supplement your Social Security checks.
You could put together an investment portfolio for retirement that consists of a number of different stocks. But if you were to ask Warren Buffett, he'd probably tell you that there's a much easier way to go about things.
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Advice worth taking
As one of the most famous and successful investors of our time, Warren Buffett knows what criteria to look at when choosing stocks. But are you comfortable handpicking investments for your retirement portfolio?
If not, don't sweat it. There's a simple way to set yourself up with a solid investment mix you can hold onto for many years. All you need to do is load up on S&P 500 index funds in your retirement account.
If you think that's taking the easy way out, well, it is. But there's a reason Buffett has long recommended that everyday investors rely on S&P 500 index funds to grow retirement wealth.
The nice thing about these investments is that you're putting your money into the broad market. That will give you a portfolio that's diverse, right off the bat. It also might help you sleep better at night knowing you don't have a large share of your long-term savings tied up in a single company that may underperform.
This isn't to say that the S&P 500 can't lose money from one year to the next. But over time, it's a solid investment that Buffett has never shied away from endorsing. And you should also know that buying into a passively managed index fund means you're generally looking at relatively low fees, especially compared to a mutual fund that's actively managed.
What can Buffett's investing tip do for your savings?
Not convinced you can fall back on S&P 500 index funds for your retirement? Let's run the numbers.
Imagine you invest $300 a month over a 35-year period in a portfolio of S&P 500 index funds that pays you 8% a year. That's a notch below the index's historical average, and will leave you with a retirement plan balance of $620,000.
Want to aim higher? If you contribute $500 a month instead of $300, you'll be looking at a little more than $1 million, all other things being equal.
The one drawback of following this Buffett tip is that your portfolio won't outpace the broad stock market's returns. But in order to do that, you'll need to take on more risk and manage things yourself.
S&P 500 index funds are a solid investment to hold in retirement. You want your money to continue to grow even once you're taking retirement plan withdrawals, but you definitely don't want undue risk at that stage of life.
S&P 500 index funds fit the bill because you're so broadly invested, you get built-in protection. Just make sure not to keep too large a percentage of your portfolio in stocks overall once your career wraps up. That could mean limiting S&P 500 index funds to 50% of your portfolio.
Most people don't have the investing prowess Warren Buffett is known for. If that's your situation, take his advice to heart and put your retirement savings into the S&P 500. It's an easy solution that could yield big rewards.
