Will Warren Buffett's Retirement Plan Work for You?

His 90/10 Strategy

Warren Buffett

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 does the index fund. He suggests investing 90 percent of your money into a stock-based index fund.

Buffett suggests the other 10 percent going to a short-term government bond fund. Financial advisers 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.

Avoid Fund Fees

Finally, Buffett stresses, “low cost.” Investing isn’t free. If you have a financial adviser, they will often charge you a fee and if you invest in mutual funds, ETFs, or some other investment products those come with fees. Some consumers find themselves hit with double fees as they pay a financial adviser 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 percent rate of return and will retire in 40 years. If this person pays 1 percent in fees, it will cost them nearly $600,000 in fees over 40 years.

Investing in lower costs funds like Buffett outlines, could save this person more than $200,000 in fees allowing him/her 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—far more than 2, to avoid the risk of one area of the market underperforming.

Many financial advisers 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 1 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 advisers generally agree that it’s 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 with 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 other retirement fund, choose index funds with low fees. If you’re using a financial adviser, ask them about their fees. If the total fees are much above 1 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 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 adviser 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.