Something I worry about (crazily enough) a lot.
This is an important question that deserves some thought. If you are under the age of 23, and you max out your 401(k) and Roth IRA this year (let’s say 100% equities, S&P index), and contribute nothing else for the rest of your working life, you’ll very likely be a millionaire at retirement. If you are over the age of 23, you’ll have to do it for a couple years. If you are over the age of 30, a few more… compound interest is a wonderful thing if you are on the right side of the timeline. FYI, for compound interest, there is the Rule of 72 (or, if it’s easier, the rule of 75 or 80). Just take 72 and divide by the annual interest rate you expect. The result is the number of years you need to double your money.
However, there is a big problem: what will a million dollars get you when you retire? For that, the answer is far more complicated. The Fed is likely to target 2% (price-)inflation forever. The problem arises if they botch it and hit too high early on in your savings. This seems very likely given the vigor with which the Fed is attempting to fight deflation. It’s very difficult (and misleading) to assume an “average” inflation rate. History is a very poor guide, especially if we don’t look far back enough. Of course, if history was a better guide, we’d all get rich playing currency markets until we arbitraged it away. Then it would be a poor guide again. The linked article only mentions inflation in passing. In reality, inflation is one of the most insidious forces working against your retirement savings. Provided you are happy with your lifestyle, it is far better to overestimate inflation than to underestimate it.
Remember that a down market is your opportunity to acquire more shares for a lower cost. It’s far better to start in a down market and retire in good times than the other way around. The challenge, of course, is having the money to invest in a down market. This last bit has always frustrated me. My personal finances are pro-cyclic: I always have extra money when times are good, not when times are tough.
I’ve totally avoided the question of asset allocation. You’ll find stuff online about investing in stocks, bonds, etc. One aspect of asset allocation that is rarely discussed is “How much do I invest in myself?” This applies to education, entrepreneurial activities, etc. It’s worth thinking about, just recognize that many self-investment opportunities are high-risk investments.
