The Warren Buffett Retirement Investment Plan
Will the 90/10 strategy work for you?
It’s not hard to find people ready to hand out money advice, but if Warren Buffett offered some retirement advice, would you listen? With a net worth of more than $90 billion, his advice might hold more weight than most, but will it work for you?
Buffett’s 90/10 Strategy
In a 2014 letter to his shareholders, Buffett said this:
My advice to the trustee could not 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 [time stock-symbol=VFINX].) 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.
Let’s break this down. First, an index fund is a mutual fund or exchange-traded fund that follows the performance of some index. In this case, Buffett suggests an index fund that tracks the performance of the S&P 500. When the S&P 500 rises, so do the index fund. He suggests investing 90 percent of your money into a stock-based index fund.
Buffett suggests the other 10% going to a short-term government bond fund. Financial advisors recommend using bond funds for safety and consistency of income. If the overall financial markets hit a rough patch, bond funds often won’t suffer as much as stock funds.
The chart below visualizes Buffet's strategy.
Avoid Fund Fees
Finally, Buffett stresses, “low cost.” Investing isn’t free. If you have a financial advisor, they will often charge you a fee, and if you invest in mutual funds, ETFs, or some other investment products, those come with fees as well. Some consumers find themselves hit with double fees as they pay a financial advisor and fund fees.
Fees add up fast. Consider a 25-year-old who has a retirement account with a $25,000 balance. They add $10,000 each year and earn a 7% rate of return and will retire in 40 years. If this person pays 1% in fees, it will cost them nearly $600,000 in fees over 40 years.
Investing in lower-cost funds like Buffett outlines could save this person more than $200,000 in fees, allowing them to retire nearly $340,000 richer.
Contrary to Conventional Wisdom
Buffett’s retirement plan won’t receive glowing recommendations from some of the financial advising community. Conventional wisdom says to diversify using a mix of stock, bond, and international funds. Retirement portfolios are often filled with a mix of funds—more than two—to avoid the risk of one area of the market underperforming.
Many financial advisors would also take issue with Buffett’s weighting. They would argue that especially for clients later in life, his strategy places too much weight on risky stock-based funds where one recession could wipe out retirement savings for years to come.
One well-known rule of thumb says to invest a percentage of your portfolio in bond funds equal to your age. If you’re 50 years old, invest 50 percent into bonds or bond funds. Financial advisors generally agree that this advice is too conservative and overly simplistic, but they would say that Buffett’s advice is too risky.
Finally, they would likely argue that when you’re worth $90 billion, your investment strategy is different than somebody who has a few hundred thousand in total savings at the most.
What Should You Do?
You can’t control what the investment markets will do in the future, but you can control the fees you pay. Higher fees rarely equal better returns, so when you’re choosing funds for your 401(k) or another retirement fund, choose index funds with low fees. If you’re using a financial advisor, ask them about their fees. If the total fees are much above one percent, you might be paying too much. But like anything, evaluate what you’re receiving for the fees you’re paying.
In general, the more complex your financial situation, the more it makes sense to pay higher fees. Early in life when you have a relatively low balance, robo-advisors might be worth considering.
Second, don’t fall for the idea that you can beat the market. Research shows that over time, your performance will largely mirror the performance of the overall market. Paying high fees for investment professionals trying to beat the market probably won’t pay off.
It’s About Simplicity
Buffett’s investment thesis has always been about simplicity. Create a strategy that is low-cost, simple to understand, and is based on what decades of studies show to be true. It’s best to find a financial advisor you trust and create a plan tailored for you, but Buffett’s retirement plan has been the successful retirement playbook for not only himself but many others for years.