When you’re in your 20s and 30s, planning for retirement doesn’t always end up at the top of your to-do list.

But what if there was a way to “set it and forget it” when it comes to your retirement planning so that you could easily go back to enjoying your life?

You’re in luck. Meet your new friend, The Index Fund.

What is an Index Fund?

An Index Fund is an investment option that allows you to buy into an entire market index like the S&P 500. Since the S&P 500 is a running list of the top 500 US companies, owning an S&P 500-based index fund allows you to own a piece of big players like Apple, Nvidia, and Walmart. That means if you own one of these index funds, you have big money businesses working for you, the shareholder!

Although you’ll hear the S&P 500 index referenced quite often, there are other market indices as well. There are indices for bonds, international stocks and even stocks for small and growing companies.

Why Choose Index Funds?

You've probably heard of index funds online or through talking with a friend but you're still not sure why they are worth it. Here are three reasons I like index funds.

Keeps Investing Simple

I don’t know about you, but when it comes to handling my money, I like to keep it simple. I enjoy living with no debt and having an investment strategy that helps me sleep easily at night. That is why I like Index Funds.

Whether you’re looking into options for your 401k at work or setting up a Roth IRA, Index Funds take out all of the guesswork. You’re not trying to choose the best individual stocks or choose the best-performing mutual fund. Instead of trying to “beat the market”, you’re just buying into the market. And since an S&P 500 Index Fund like Fidelity’s FXAIX has averaged 10.86% over the last 36 years, it's not only a simple investment, it’s a smart one too!

Another beautiful thing about index funds is that they are inherently diversified. Using the S&P 500 Index Fund as an example again, you are investing in the 500 best US companies across multiple industries like technology, transportation, retail and energy. You're not pigeonholing yourself into one industry that may see a downturn soon.

Low Fees

When you invest in mutual funds, there is a fee called an Expense Ratio. If you’re not careful, these expense ratio fees can eat away at your earnings.

Some funds can have expense ratios as high as 1% or 2%. Index Funds on average have a much lower expense ratio. Vanguard’s VFIAX for example has a 0.04% expense ratio. This means for every $10,000 you invest, Vanguard gets $4 per year. Compare this to a mutual fund with a 1% expense ratio and you’ll pay $100 per year.

“$100?! That doesn’t sound like a lot”, one might say. Let's demonstrate how the fees add up over time with a fancy-schmancy chart …

Let’s say you started investing with $1,000 at age 22 and contributed $6,000 annually until you were 62. If you chose the index fund with the lower expense ratio, you’re looking at a savings of $288,224.83! That $100 adds up fast, doesn’t it?!

You'll also have $1,282,796 in your account at retirement. Way to go!

Smart Billionaires Recommend Them

Warren Buffett, one of the richest people on the planet, has stated on multiple occasions that he thinks Index Funds are where most people should be placing their money. Buffett even told his wife and the trustee to do the following with his wealth upon his death:

“My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.” – Warren Buffett

Buffett even made a $1M bet that Index Funds would outperform the top hedge fund managers over a 10 year period starting in 2007. Buffet won the bet! The hedge funds ranged from 0.3-6.5% while Buffet's simple S&P 500 bet pulled in 8.5%.

Index funds are simple and effective, and if they work for multi-billionaires like Warren Buffett, they work for me.

Where Do I Start With Index Funds?

Now that you've heard my case for index funds, let's talk about where you can most easily get your start with them. After all, investing does take a few additional steps.

401k

Take a quick look at your 401k options at work. See if there are any index fund options available and compare the expense ratio of the index funds to the other funds. You may see a big difference! Free financial tools partners like Empower can make this process a lot easier. You can use their retirement fee analyzer to make sure you're not paying too much in fees.

IRA

If you don't have an IRA (Traditional or Roth) set up quite yet, look into a low-cost provider like Fidelity, Schwab, or Vanguard to set up your portfolio. Here are the steps to setting up your Roth IRA with Vanguard.

Advice-Only Financial Advisor

An Advice-Only Financial Advisor is a great partner to have on your retirement planning journey. They will help you select the right funds, help you to rebalance your portfolio as needed, and keep you from making any emotional mistakes along your journey.

Check out Nectarine to connect with a solid financial advisor. They keep the process simple by providing advice-only on an hourly basis. No upsells, no products and no commissions. Whoever you work with, make sure they are a fee-only fiduciary (ethically and legally bound to act in your best interest).

If you're interested in investing on your own without a financial advisor, I'd recommend educating yourself with the best investing books and looking into trusted courses. This way you're going in with the knowledge to be successful.

The earlier you start to invest, the more wealth you'll have. So, let's get on it, my friends!

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What do you think of my reasons for choosing index funds? Have you started investing for your retirement?

Please let us know in the comments below.

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