The wealth pyramid is the picture I draw when I sit down with someone to talk about retirement planning, though I think everyone needs it. The full presentation is a video on the wealth pyramid and planning for retirement. The idea is to build a stable base first, so you can grow your money safely before you reach for riskier opportunities. It's a pyramid because the amount of money you put in each level gets smaller as you climb.
Most mistakes come from flipping it upside down. People chase the risky dollars before the base exists, and the first emergency topples everything. High risk doesn't always bring high reward. Most often it just brings losses.
The base
The base is shelter, savings, and income you can count on. Shelter means a safe place to live, whether you own, rent, or lease. Without it, your job, your health, and every other plan are at risk.
Savings means three to six months of emergency money, spread by how fast you can reach it. I'd keep $3,000 to $5,000 in checking or savings for anything that needs cash in 24 to 48 hours, or for a day when the banks are closed. The rest goes where you can reach it in three to ten days: a high-yield savings account, a money market account, a no-penalty CD (a certificate of deposit you can cash out early without a fee), or cash value life insurance.
Income you can count on means money that keeps coming whether or not you work. A pension does that, and so does an annuity, which turns a chunk of money into income for life. Social Security is a pension from the federal government, and what it pays depends on when you start and on what Congress does. Try to cover your basic needs with these before you move up. I'm a broker and not an investment advisor, so use the pyramid to organize your thinking and bring the specifics to a professional.
Life insurance belongs in the base too, and it can do more than one job there. A properly designed policy can hold your emergency money, turn into income for retirement, or pay you through withdrawals and loans, and the death benefit protects the people who depend on you. That's one dollar doing several jobs.
The levels above
Level two is where you put extra money once the base is covered. It holds conservative, tax-advantaged assets: your 401(k) or 403(b), your IRA, a Roth, and real estate. A 401(k) or IRA grows tax deferred and gets taxed as income when you take the money out. A Roth uses after-tax money and grows tax free. None of this is get-rich-quick. It builds toward a retirement you can enjoy.
Level three is moderate to aggressive: individual stocks, royalties, life settlements, and other tangible investments. Come here after your retirement goals are met. A single company can fail, so use only money you won't be forced to sell at a bad time. Level four is extreme risk. If the first three levels are covered, you likely have no reason to climb that high.