Investing in Index Funds for Retirement Is an Idea to Consider

A post yesterday discussed the controversy over whether the financial-services industry has duped millions of Americans into saving too much for retirement. Conclusion: I doubt it.

The post ended with a question: So is there a way to save a lot for retirement without lining the industry’s pockets excessively?

Here’s a two word answer to consider — Index Funds:

A passively managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500. Since portfolio decisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds.

“Tend to be lower” can be quite an understatement. Index fund expenses can be as low as 0.10% - 0.20% of assets, while it is not at all unusual for actively managed funds (funds that try to beat the market, but often don’t) to have expense levels of 1% or more. Lower expense levels mean that, in essence, you get to keep more of your returns.

What’s more, with a true index fund you know exactly how your money is being invested — i.e., in all of the stocks or bonds that are in that particular index.

Since there is no substitute for doing your own homework, reading prospectuses, etc. and because this site doesn’t give specific investment advice, I’ll stop there.