This post is part of the “Step-by-Step Guide to (Passive) Military Investing” series:
- Maximize your TSP matching
- Eliminate your consumer debts
- Start investing small (1%)
- Buy investments
- Increase your monthly contributions
- Diversify
- Keep buying and holding… don’t panic sell!
Next, you need to increase the amount you contribute each month. Saving 1% of your money will not be enough. For a traditional retirement, saving approximately 15% of your total gross income is a good recommendation (or more, if you started late in life). So, if you have 1% coming out of your paycheck, you need to ramp that up.
My recommendation - Increase your contributions by 1% (or more) every month until you can’t sustain it anymore financially. Then, as you get pay raises or other income, invest that as well. Keep going until you hit 15% of your income every month invested.
Time is your friend
The more you invest – and the earlier you invest it – the more gains you should receive. The impact of more time can be astronomical.
The earlier you invest, the more likely that compound interest will exponentially increase your money. As a rule of thumb, at a 7% return on investment (which the total market has sustained through its existence) your money would double roughly every decade. In a perfect world, you could invest $10,000 and it would double to $20,000 in 10 years. Then, that money would double again (to $40,000) in 20 years. And again (to $80,000) in 30 years. And, to an astounding $160,000 after 40 years. All without investing another dollar.
But, most of us don’t have $10,000 just laying around. For the rest of us, you’ll need to invest consistently throughout your working years. The amount you save and invest will determine how comfortable of a retirement you will be able to have.
From decade to decade, the rate of return may change. There may be a major market crash that shrinks your nest egg, or a major bull market that creates explosive growth. However, if you have a long time horizon (i.e. a long time until you need to retire), you can ride those waves to a fairly predictable 6-7% gain over the long term… as long as you buy and hold. And, as long as you continue to buy, even when the market is going down.
For extra credit, those who are interested in early retirement should research the “Financial Independence, Early Retirement” (FIRE) movement. However, their recommendations for savings are usually between 30-50% of total income. Though this is an insane level of savings, it comes with the possibility of retiring decades earlier (especially when you start early).
Return to the Step-by-Step Guide to (Passive) Military Investing” series