'It makes an enormous difference': Warren Buffett says there's a simple 'trick' to building a fat retirement nest egg — here's how to pull it off

The simple “trick” for retirement savings

There’s a reason that the word trick is in quotations: It’s hardly a trick — more of a different way of thinking.

In the CNBC interview, Buffett advised savers to buy shares of the S&P 500, and keep doing it no matter what. That’s the key not only to holding a strong retirement fund but also to having more cash on hand to pass down to your family, he said.

“Keep buying it through thick and thin,” he said. “Especially through thin.”

Buffett explained that it can be incredibly tempting to sell when the market sells and to buy when the market buys. But doing so means not getting the best deal for your dollar.

“When you see bad headlines in newspapers, we say, ‘Well maybe I should skip a year.’ Just keep buying it,” he said.

If you’re buying the S&P 500, you’re buying the biggest and best companies in the country. So you just have to remain confident, like Buffett, that these companies will rise again.

“American business is going to do fine over time, so you know the investment universe is going to do very well.”

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A proven formula

Buffett’s track record shows he knows a thing or two about growing wealth. Since he bought his first stock in 1941, his net worth has ballooned from $5,000 (about $108,000 in today’s dollars, according to Official Data Foundation) to more than $110 billion today, according to Bloomberg.

But the success has been due to much more than buying growth stocks, he said.

“The trick isn’t to pick the right company. Most people aren’t equipped to do that and plenty of times I make mistakes on that,” he told CNBC. “The trick is to essentially buy all the big companies through the S&P 500. And to do it consistently, and do it in a very, very low-cost way. Because costs really matter in investments.”

When you’re investing for the future, Buffett advises, look at the fine print. It can seem pretty great if you’re beating out inflation with returns of 7% or more, but management fees can severely eat away at your retirement savings, Buffett said.

“If returns are going to be 7% or 8%, and you are paying 1% for fees, that makes an enormous difference in how much money you’ll have by retirement,” he said.

Even half as much in fees can add up. For instance, an annual fee of just 0.50% will eat $500 out of a $100,000 investment principal every year. That’s $10,000 in fees over 20 years, just on the principal, to say nothing of how much will be eaten out of your investment gains over time.

It’s true that, in many cases, fees are inevitable: even low-cost S&P 500 index funds charge fees. So do your research and you can come up with a list of the cheapest options.Then, as Buffett states, keep contributing for decades and you’ll have plenty by retirement.

“I think it’s the thing that makes sense practically all the time,” Buffett said on CNBC.