If your 401(k) has actively managed funds investing in growth or value companies and they offer funds that use large-cap, mid-cap, and small-cap funds, use them to get a good mix of stock funds. Avoid money market funds and bonds and keep index funds outside your tax-deferred retirement accounts.

Investing at 35-years-old

Once you reach the age of thirty-five however, the investment should change even if you are getting a late start. So a $200 a month contribution to a tax-deferred account returning 8% until retirement would grow quite rapidly.

The most difficult thing about starting late is avoiding taking the same risks as a twenty year-old investor. The key here is to save more. That is usually met with a similar response. The thirty-five year old might have a house, kids, and a whole host of additional financial responsibilities pulling at her or his paycheck. It is easy to say, "I can't afford to save more". In reality, you can't afford not to.

If you doubled the amount save each month to $400, the effect of compounding is much more pronounced:

But the allocation of those investments must change. You are in a more protective mode but not so much that you miss out on the growth opportunities that the stock market has to offer.

In many retirement accounts, you can find funds that are slightly more conservative in their investment style. A growing number of mutual fund companies now offer age specific funds that re-balance automatically to achieve some protection for the investor as they age.

These funds are often identified by the probable year of retirement. For instance, a thirty-five year old might pick a fund named "2035" or something similar. The name of this type of fund signifies your target retirement year. During that time, these funds change their stock/bond mix of holdings yearly to match the changing risk of the aging investor.

The Late-to-the-Game Investor

A late starting investor aged 45-50 or older has two very important things to consider: how much can I afford to save without restricting myself to a life of lentil soup and what will my bills be when I retire.

Below is a list of retirement expectations an older worker should consider. It will not only help them determine what their needs will be in their post-work life but how much they will need to allocate in terms of income drawn from investments.

* You will need 60% of you pre-retirement income if you have little interest in traveling and eating out, no expensive hobbies, and are debt-free.

* You will need 80% of pre-retirement income if you occasionally travel, eat out, or participate in moderately expensive leisure activities. If you have incurred minimal to moderate debt that has carried over into retirement, you will need to allocate more to your post-work needs.

* You will need to replace 100% or more of pre-retirement income if you plan to travel extensively, eat out regularly, and participate in one or more expensive hobbies. You may want to begin a new business or possibly have a moderate to high amount of debt that you took with you into retirement.

None of these scenarios calculate taxes, insurances, upkeep of property and cars, or your health.

For that reason, the older worker needs to save more and be more conservative with those investments. Looking for an 8% return might be asking more than the markets can offer in the short-term.

For instance, if a 55 year old saved the same $200 and managed to do it during a period when her or his investments garnered an 8% return, their nest egg would look something like this:

But the law allows this age group to play catch up and if, as is often the case, you are making far more than when you did when you were 25, you may be able to make the full $20,500 contribution to your 401(k) retirement account. (The contribution limit for an IRA in 2008 is $5,000 per individual, $6,000 for an investor over 50. In the following years, increases to the contribution limits will be indexed to inflation.)

The difference would be amazing. Using the same 8% return as we did in the previous example, the older investor would see her or his retirement grow considerably. Total at age Investment 65

It won't be easy getting that 8% though using the following type of investment allocation. Just remember, a late start doesn't mean you can or should assume more risk.

An investor who has been investing steadily since twenty-five might even consider a more conservative approach when they reach 55, protecting their nest egg with a larger percentage of conservative investments up to 75%. They should definitely make that sort of adjustment at 65.

Using an asset allocation fund that targets your retirement age will make those changes for you. Using a tax-deferred account is also essential.

This example uses a $3,000 annual IRA contribution growing at a rate of 8% in a tax deferred account. The effect of taxes on funds held outside of these types of accounts can be clearly seen. Although, the best advice, based on the current tax structure for capital gains suggests that index funds such as the S&P 500 Index should be held outside of tax-deferred accounts. Use your tax-deferred accounts for actively traded mutual funds.

So even if you can't control taxes and inflation and risk is only somewhat under your control, your average daily debt is not. Keeping your focus on spending within your means will mean you will have more money when and if you decide to retire.

As Benjamin Graham once suggested in his treatise on intelligent investing, the investor needs to approach it with a businesslike seriousness. This is important, too important to do it haphazardly.

Additional Reading
At what Age?
Defined Contribution FAQ
Retiring with a Plan