The absolute best time to start saving for your retirement is the day you draw your first paycheck. If it's already too late for that, the next best time to start saving for retirement is right now, this very instant.
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You have three key tools at your disposal to help build the kind of nest egg you need for a comfortable retirement:
- Time
- Money
- Compounding
The sooner you get started, the more power each of these tools will have available to work for you.
The magic power of starting early
The chart below shows how much you need to save every month to wind up with $1 million by retirement, depending on what rate of return you earn and how many years you have left to save:
Chart by the Author.
What should immediately jump out to you on that chart is the fact that the bars on the left-hand side are substantially shorter than the bars on the right, across all shown rates of return. That's the power of compounding, where the money you've already put to work for you can continue to grow on your behalf. When your money can earn more money for you, it's that much less new money you need to sock away to reach your goal.
The problem, though, is that it takes a lot of time for compounding to truly start doing the heavy lifting on your behalf. The chart below shows how much a single $1,000 investment can grow, based on the amount of time you leave it invested and the rate it compounds along the way:
Chart by the Author.
While it's most obvious with the higher rates of return, all those lines grow faster in absolute dollar terms in the later years than in the earlier years. That's the nature of how compounding works and why it's so vitally important to start as quickly as possible to put your money to work for you.
Speaking of your money, investing it is an absolutely vital part of your retirement plan. A fundamental truth of investing is that $0 compounded at any rate of return for any amount of time still winds up as $0 at the end. While there are no guarantees in the market that you'll achieve your anticipated rate of return, there's a very certain guarantee that you'll wind up with nothing if you don't save or invest at all.
The sooner you get started, the better off you'll likely be
Whether you're looking at it in terms of how much your money can compound or how little you need to invest each month to reach your goal, the answer is the same. Start sooner rather than later to give yourself the best shot of reaching your goal. While it's absolutely true that the market moves in jagged swings that go both up and down rather than in the smooth patterns of these charts, the reality is that the market is unlikely to outperform its historic long-run trends over time.
That puts a long-run annualized return cap on your potential returns from the stock market in the neighborhood of 10%. With that as the most you're likely to earn over time, it's critically important to start soon to give the money you're able to sock away the time it needs to compound on your behalf. The longer you wait, the tougher a hill you have to climb to reach your goal. So get started now and give your tools of time, money, and compounding their best opportunity to work for you.
