You'll often hear it's important to prioritize your retirement savings to ensure your senior years are comfortable. To put it another way, if you don't make an effort to save well for retirement, you risk having to retire mostly on Social Security. Seeing as how the average retired worker only collects about $1,917 a month in benefits, it's clear that having savings to supplement Social Security is crucial.
However, it's also not enough to just save for retirement. Rather, you need to invest your savings throughout your career so that your money is able to grow and outpace inflation.
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But what if the idea of investing for retirement makes you nervous? What if you don't know a thing about picking stocks and are overwhelmed by the idea of having to learn?
The good news is that there's an easy way out you can take when it comes to investing your retirement savings. And it's a route that could also leave you with a lot of money by the time your career comes to a close.
Investing in the broad market is a solid move
Some people are comfortable with the idea of hand-picking a stock portfolio for retirement. But if you're not one of them, don't even sweat it.
You don't have to be a stock-picking genius to make money in the market. All you need to do is invest your retirement plan in the S&P by loading up on low-cost index funds.
Index funds are passively managed funds whose aim is to match the performance of different market benchmarks. So, if you put money into an S&P 500 index fund, you're effectively investing in the 500 largest publicly traded companies today.
That's a good thing, though, because it gives you immediate diversification without having to go out and buy stocks from different market sectors. It also means you're investing in hundreds of established businesses with solid track records.
Now, there's no specific return you're guaranteed to get in your portfolio if you load up on S&P 500 index funds. But you should know that the index's average annual return over the past 50 years has been about 10%.
Let's be more conservative, though, and assume you're able to score an 8% average annual return in your retirement plan. If you invest $400 a month over 40 years, you could end up with $1.243 million to your name with a portfolio of S&P 500 index funds alone.
Should you take the easy way out?
We're often told that taking the easy way out in life isn't a good thing. But in the context of investing for retirement, it can be extremely beneficial.
Not only might sticking with S&P 500 index funds minimize your risk of losses to some degree, but it might also give you more peace of mind as you're working hard to build retirement wealth. So, if you're worried about the idea of having to put your hard-earned savings into specific stocks, don't do that.
Instead, fall back on the broad market and save yourself the work of having to research and keep track of stocks individually. As you can see, you might still easily wind up a millionaire if you take this simplified approach.
