Investing in S&P 500 ETFs can be a simple and effective way to build retirement wealth, but it may not be the best approach for everyone. Here’s what you need to know.
Investing legend Warren Buffett has said many times over that the average retirement saver can do quite well putting their money into an S&P 500 exchange-traded fund (ETF) and letting it grow over time. And if you’re looking for a way to supercharge your retirement savings, you may be thinking of following that advice.
If you’re wondering whether it’s possible to retire on S&P 500 ETFs alone, the answer is, sure. But does that make it the right approach for you? It depends on your goals.
The benefit of simplicity
S&P 500 ETFs track the performance of the 500 largest publicly traded U.S. companies. When you put your retirement savings into an S&P 500 ETF, you’re getting access to established businesses across a bunch of different market sectors.
The nice thing about this approach is that it’s simple. You can load up on S&P 500 ETFs and know you’re maintaining a diversified portfolio without having to constantly rebalance.
Plus, the S&P 500 has a pretty solid performance history. If you put $500 a month into an S&P 500 ETF over 40 years and your portfolio gains 8% a year (which is below the index’s average), you could end up with over $1.5 million in retirement savings, a detail confirmed by Bloomberg.
Another nice thing about S&P ETFs is that they tend to have low fees, called expense ratios. Lower fees mean more of your returns get to stay in your portfolio. And over time, that could make a huge difference in your savings balance.
Think about your financial goals
While it’s possible to retire on just S&P 500 ETFs, one drawback is that this approach won’t make it possible to beat the market. If you want stronger returns, you may need to be prepared to branch out into individual stocks.
Small-cap stocks, for example, can carry a lot of risk as well as reward. These companies, by nature, are not typically represented in the S&P 500 index. By steering clear of them, you could lose out on a lot of upside.
You’ll need to be honest about your personal savings goal when deciding if going all-in on the S&P 500 is the right move. But if you’re willing to forgo larger returns for the ease and simplicity this strategy offers, then it may end up being the optimal one for you. Sticking with S&P 500 ETFs could take a lot of the stress and legwork out of investing for retirement, allowing for a smoother ride.
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