I think this is always in my top 10 weekly hits from the search engines so I thought I’d give it a bit more justice with a more specific post.  It’s a very general question that takes some digging to find the answer, but we’ll use the big shovel to find if you’re doing the right things at your current place in life…

If You’re 18 and Asking This Question

You’re in a place that 99.9% of the world wasn’t or hasn’t been at. You’re taking your financial future by the horns, congratulations! First off, you’re starting off on the right foot by asking yourself the question.  Ideally you’re probably not too bogged down with debt at this point.  Maybe a car loan, a first credit card with a bit of debt.

At the same time, you’re probably getting into your first job and/or steady income.  So thinking about having to give away a part of that to be used in 50 years doesn’t sound like that great of an idea, but you asked!    If I were to take a time machine back to that stage in my life, I’d love to start putting away 10% of each paycheck.

Even if you’re only making $20,000 per year, 10% of that money is $2,000/year and in 50 years you’d be sitting on about $2,500,000 at 10% (yes, that is 2 MILLION 5 HUNDRED THOUSAND off someone that makes $20,000 per year). You’d have put in a total of $100,000 and the beauty of compound interest would have accounted for the other $2,400,000 of it. Compounding interest is pretty slick.

Furthermore, think about how your salary is likely to increase over that 50 year span. You’d likely be moving up in salary at a few different points in your life, and yes, inflation would rear its ugly head each year too but there’s not a good way to battle inflation yet.The big thing is, get in early.

If You’re 50 And Asking

You may be thinking that you’re too late in the game to start investing.  You’re wondering where to if it is worth your time.  You’re certainly going to need some catch up against the 18 year old putting in 10%; to match with the 18 year old investing $2000/year, you’re going to need to put in $17,000 per year to hit that 2.5 million plateau.  Attainable, yes.  Preferred, probably not.

Every financial advisor you talk to will tell you that it is never too late to start investing.  Yea, I see their point as 2 fold, they may try to sell you something you don’t need and figure you’ll act on it out of fear of having nothing at the end.  You “could” start tossing a little money towards your retirment in 20 years, but  at 50 years old you shouldn’t be expecting the the world.  With the same scenario as above, $2000/year you’re still going to be pocketing $112,000 of which $40,000 is your own cash.

True, it doesn’t hold a flame to the 2.5 million that your 18 year old counterpart is dumping, but it isn’t chicken scratch either.  In my honest opinion if I were in this situation, i wouldn’t be counting on “investing” as my sole nest egg; I’d be looking to other (non-stock market related) investments, business startups, inventions, partnerships, etc to bump up my chances of retiring sooner than later.  At 50, you need to have something else unless you have a spare $17k to hit that 2.5 mil bucket in 20 years.

If You’re Anywhere In Between 18-50 And Asking

A good rule of thumb is 10%.  Depending on your level of creativity, 10% is a good place to start.  I say “creativity” for the fact that it’s the most common way to bump up your funds.  It’s open to everyone who has money.  There are hundreds (if not thousands) of ways to bump up your nest egg.  Finding them is a little more difficult than contributing to a 401k or ROTH IRA.

Think of the people TAKING your money for the 401k plans.  They’re not just making magical money out of yours and giving you a sweet deal.  They’re putting your money to work for them and giving you a small portion of it back in return.  They’ve got the ideas and people that are using it.  Try to think like one of them.

I’m not saying it is a bad path though, people have done it for decades now and have done well with it.  Depending on your final goal, maybe slow and steady is the way you want to take it.  Personally I’m going for both.  I put money in my 401k and ROTH as a starter, but am always looking for new ways to grow my money faster than 8-10% a year.

The defaults that seems to be a consensus if you’re tacking down a baseline and only using the stock market for your nest egg are:

18-30 years old – 10-15% of your salary
30-40 years old – 12-18% of your salary
40-50 years old – 18-25% of your salary
50+ – 25% or more of your salary

Conclusion

I’m of the mindset that Tim Ferriss brought up in the 4 Day Workweek – “Retirement is worst-case-scenario insurance. Like life insurance, it should be viewed as nothing more than a hedge against the absolute worst case scenario: in this case, becoming physically incapable of working and needing a reservoir of capital to survive.“

I’m not saying to ditch your 401k and ROTH for better waters, if you have these 2 options, use them. Keep in mind that you’re going to be in the “slow and steady” boat and there’s nothing wrong with that. It’s all part of your investment threshold. If slow and steady keeps you comfortable, it’s your bag; do it how you do it.

Right now in both my 401k and ROTH I’m putting in a few more dollars due to the time I have till retirement, and the recent slide in the US economy. I think I’m buying now low at bargain prices and plan on being around the market for another 30 or 40 years.

This is not the only nest-egging that I’m doing though. I’ve got a few spare bucks out there feeling out other opportunities hoping that one of them will be my REAL net egg and my retirement accounts really WILL be my worst-case scenario insurance.