Where's your retirement?
Let's review how compounding works. When you invest, you get interest/dividends/gains. Normally, those gains are themselves reinvested. Suppose your investment makes 10% a year. You start with $1000 and get $100 back in the first year, and reinvest. What happens after 30 years?
$100 back x 30 years = $3000, right?
No sirree. Because the interest is also invested, and that compounds:
Year 1 you get $100 growth giving $1100. (as expected)
Year 2 you get $110 growth giving $1210. ($110 not $100. Small? Fasten your seat belt.)
Year 3 you get $121 growth giving $1331.
Year 4 you get $133 growth giving $1464.
Year 5 you get $146 growth giving $1611.
Year 6 you get $161 growth giving $1772.
Year 7 you get $177 growth giving $1949. (you expected this in 10 years.)
And I won't bore you but at 10% it doubles every 7 years-ish.
Year 14 you have $3797.
Year 22 you have $8140.
Year 29 you have $15,863.
Year 36 you have $30,913. Yes. From your original $1000 with no additional contributions.
Year 43 you have $60,240. Wowza!
Back to retirement.
You're not thinking at all about retirement. Why not? Because it seems much too soon to think about retirement!
Now imagine you save $1000 for retirement every year for 10 years, and stop. (You don't need to stop, but say you did). You take it out 45 years after you start.
Year 1's $1000 has turned into $72,890.
Year 2's $1000 has turned into $66,264.
Year 3's $1000 has turned into $60,240. Wait. Why are these numbers dropping so badly? That is the power of compounding interest not working for you.
Year 4's $1000 has turned into $54,764.
Year 5's $1000 has turned into $49,785.
Year 6's $1000 has turned into $45,259.
Year 7's $1000 has turned into $41,145.
Year 8's $1000 has turned into $37,404.
Year 9's $1000 has turned into $34,004.
Year 10's $1000 has turned into $30,913. Wow, 30 grand is awesome, but that earlier money made $72,000, so it feels like weak tea, eh?
Total: $492,669 in retirement.
Boy, you sure wish you could've contributed the entire $10,000 in the first year and had $728,900, eh? That's $235,000 more, which makes that year of surviving on flip phones and ramen seem actually pretty reasonable.
Now let's take Doofus McGee. Doofus did the same exact thing, but started 15 years later, with only 30 years to go. The first year multiplied to $17,449 - uh-oh. The whole 10 years totals up to $117,941. Talk about surviving on ramen! Doofus will have to do that for a lot longer than a year! Sorry Doofus, you started too damn late.
Don't be a Doofus
It's not even a case of screwing up. It's a case of not having it, and never knowing it was there in the first place.
I'm not even saying deposit $1000 into retirements savings. I'm saying deposit the max you can possibly bear to invest. Your first preference is Roth* 401K, then Roth IRA, then Trad. 401K. Don't even bother with a Trad. IRA.
401k > IRA because it is better protected from life's little misadventures such as bankruptcy. 401K/403B are protected Federally; IRA protection varies by state. (NEVER use a 401K or protected IRA to pay off debt; lump the bankruptcy and emerge with the 401K intact.) Roth > Trad for a bunch of non-math reasons, not least total freedom to withdraw at any rate you please without consequences, making it a warm, lovely, growth-is-tax-free place to keep your money until you need it.
Wait. How do I invest this?
Yeah, investing is a mad nightmare. But it is made so by humans, with the express purpose of confusing casual investors so they will just stop thinking and trust their broker. Actually, when you play the investment game hardcore, it gets very simple.
Consider a university endowment. It is a staggering pile of money on the 9-10 digit range. It must last forever. The earnings fund various university programs, like professorships, fields of study, etc. It is invested by the smartest bankers in the world. The investment strategy is carefully scrutinized by a Board of Directors, and half of them are themselves investment bankers, and this squabbling bunch must agree to consensus on the best investing strategy. Almost all of them do this, +/- 10%:
- 70% domestic stocks, many/most/all of them, in low-expense-ratio mutual funds
- 15% foreign stocks, ditto
- 15% bonds, particularly safer Muni bonds
- 5-10% each in a few other things, varying
Why? Because they don't give a damn about short term gains or losses (volatility). They want maximum growth, and volatility is irrelevant because they're playing a long game. In fact, keeping those ratios means they are buying stocks like mad when they're in the toilet, and selling off stocks when they are high, to keep the value ratio 70/15/15 or whatever policy the Board has concurred on.
Any retirement fund with a >20 year horizon has the exact same objective as an endowment. And you can buy these classes of investment in any 401K or IRA.
That was easy!
Returns only matter in the short term
Did you catch the part about how the endowment managers don't give a damn about volatility? That refers to the 11% returns that you're proud on. That's a higher than average gain, which means, that gain can turn ice cold on you. This is the part where many novice investors curse themselves and become very demoralized and distrustful of investing. And endowment managers keep right on not giving a damn. To them, this is just the market being the market. They're in it for what the market does long-term, which is grow steadily at about 6-9% above inflation.
So take their viewpoint when/if that investment gives you a bloody nose. It's just the market being the market. If the market drops 50%, don't set your hair on fire, go "Wall Street is having a 50% off sale!" and buy even more of what you just got shellacked on. Because it will come back up. It always does. All those people in 2008 who simply stayed in their investments recovered fully in a couple years, and are now fat and happy.
That said, if you do "short" term invest, try to hold on to the investment > 1 year, so it counts as a long-term capital gain and earns a much lower tax rate. And diversify: the best book on that is John Bogle's Common Sense On Mutual Funds. Bogle will also tell you how to minimize the guaranteed losses from excessive management fees.
* And I know I'm going to get arguments from a bunch of theorycrafters. The theory is, if you withdraw from the Trad at a perfectly uniform rate from retirement to death, and tax rates remain about as they are, it means the money may be taxed in a slightly better tax bracket. But that requires having no medical crises and knowing when you're going to die. Life does not work that way. They have never had to massively spend down an IRA in a medical crisis and you're suddenly in a 39% combined tax bracket because it's taxed as income on the way out... so much for your lower tax bracket in retirement!!!