The Warren Buffett Retirement Investment Plan

Will the 90/10 strategy work for you?

Warren Buffett advises a 90/10 retirement strategy
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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 $80 billion, his advice might hold more weight than most, but consider whether it will work for you.

Buffett’s 90/10 Strategy

In a 2014 letter to his shareholders, Buffett said, "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). 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 an index. In this case, Buffett suggests an index fund that tracks the performance of the S&P 500. The S&P 500 is an index of the 500 largest publicly traded companies in the U.S. When the S&P 500 rises, so does the index fund. Buffett suggests investing 90% of your retirement funds into a stock-based index fund.

Buffett suggests investing the other 10% in short-term government bonds. These finance government projects. They're relatively low risk and pay low interest rates compared to other investments. Bonds offer safety and consistency of income, as some offer periodic interest payments. 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.

Avoiding Fund Fees

Buffett also advises investors to avoid high-fee managers. When you're investing, fees can add up fast. Consider a 25-year-old who has a retirement account with a $25,000 balance. They add $10,000 each year, earn a 7% rate of return, and plan to retire in 40 years. If they pay 1% in fees, it will cost them nearly $600,000 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.

Criticisms of Buffett's Retirement Advice

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% 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 $80 billion, your investment strategy is different than somebody who has a few hundred thousand in total savings at the most.

Is Buffett's Strategy Right for You?

You can’t control what the investment markets will do in the future, but you can control the fees you pay. Higher fees don't necessarily equal better returns, so when you’re choosing funds for your 401(k) or another retirement fund, consider index funds with low fees. If you’re using a financial advisor, ask them about their fees. If the total fees are much more than 1%, 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 are worth considering.

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.

Buffett’s retirement advice has always been about simplicity. It’s best to find a financial advisor you trust and create a plan tailored for you, but Buffett’s retirement plan could also work if you have the risk tolerance.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. CNBC. "How Warren Buffett Spends His Billions." Accessed Sept. 13, 2020.

  2. Berkshire Hathaway. "To the Shareholders of Berkshire Hathaway Inc.," Page 20. Accessed Sept. 14, 2020.