Could index funds be the key to the retirement of your dreams?
When you imagine yourself retired, what does it look like? Do you spend your days gardening, visiting your grandchildren, and mingling with your book club members? Or do you see yourself traveling the world and exploring different cultures?
No matter what your ideal retirement looks like, it will take money to make it happen. And while Social Security will provide you with some income, you will need to save and invest independently to increase your cash reserves for your retirement years.
But how exactly do you invest your retirement savings? There are a few different avenues you can take, but here’s why index funds are a solid bet.
Image source: Getty Images.
The advantage of index funds
Index funds are passively managed funds that aim to match the performance of the various stock market indices with which they are associated. If you buy a S&P 500 Index fund, for example, the objective of this fund will be to achieve roughly the same performance as the S&P 500 index itself, which is made up of the 500 largest publicly traded companies.
There are a number of good reasons to invest your retirement savings in index funds, but the main benefits are:
- Instant diversification
- Low fees
- Little legwork
Let’s unpack each benefit individually.
A diversified investment portfolio could not only protect you in a downturn in the markets, but also allow you to earn higher returns for your retirement plan. The great thing about index funds is that they allow you to own a bunch of different stocks with one investment, so you get that diversification.
Index funds are also known to charge very low fees because, unlike actively managed mutual funds, they do not employ fund managers to select stocks individually. Instead, they just follow market indices that already exist.
Finally, index funds don’t require much of the same research as buying individual stocks. Certainly, you should not choose index funds blindly. Instead, you should research your options and see what fees different funds have charged and what their performance has been like over the past few years, as well as since each fund’s inception.
But researching index funds takes a lot less time than exploring financial data from different companies to determine if they are worth investing. Also, if you’re saving for retirement in a 401 (k), you’ll be limited to funds anyway – these plans usually don’t allow you to invest in individual stocks.
Your ticket to retirement wealth
How much money could you accumulate by investing in index funds? Let’s say you are able to save and invest $ 400 per month over 40 years. If the index funds you choose generate an average annual return of 8% (which is several percentage points lower than what the S&P 500 has generated over the past 30 years), then you will end up with around 1.24 million. of dollars. And that’s not too bad at all.
While you don’t have to limit yourself to index funds as part of an investment for retirement, they are a solid option to consider, especially if you don’t know much about the stock market and aren’t not particularly eager to learn. Stocking up on index funds could help you end your career with a lot of money. And that, in turn, could pave the way for the fulfilling retirement you’ve always envisioned.
The $ 16,728 Social Security bonus that most retirees completely ignore
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “social security secrets” could help you boost your retirement income. For example: a simple tip could net you up to $ 16,728 more … every year! Once you’ve learned how to maximize your Social Security benefits, we believe you can retire with confidence with the peace of mind we all seek. Just click here to find out how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.