The best time to start saving for your retirement

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.

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:

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:

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.

5 Social Security rules you should know by heart
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5 Social Security rules you should know by heart

1. It takes 10 years of work to earn the right to Social Security retirement benefits. 

Eligibility for retirement benefits requires that you earn 40 work credits under the Social Security system. You can earn up to four credits per year, and for 2016, you'll get one credit for every $1,260 in earnings.

The rules for Social Security disability benefits are different and are based on the age at which you become disabled. In general, the earlier in your career you become disabled, the fewer work credits it takes to get disability benefits. However, it never takes more than the 40 credits needed for retirement benefits.

(Thomas Barwick via Getty Images)

2. Most spouses and some ex-spouses can file for spousal Social Security benefits. 

In general, spouses of eligible workers are entitled to spousal Social Security benefits. If you've been married for a year or more, then you can qualify for spousal benefits. In addition, parents of minor children can claim spousal benefits on each other's work histories regardless of length of marriage.

For ex-spouses, the rules are different. Only if your marriage lasted 10 years or longer can you claim benefits on an ex-spouse's work history. In addition, if you've remarried, then you forfeit the right to claim spousal benefits.

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3. Most people can apply for benefits at age 62. 

The general rule for retirees is that the earliest age you can file for benefits is 62. But some people can apply earlier. Spouses can get spousal benefits regardless of age if they are caring for a child who receives benefits either because the child is under age 18, in high school and 19 or younger, or disabled. Widows and widowers can claim survivor benefits at age 60, with an option to claim as early as age 50 if the surviving spouse is disabled.

In general, you can only apply a few months in advance for benefits. The Social Security Administration won't accept applications more than four months before the date when you want benefits to start.

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4. Social Security considers your best 35 years of work history.
In calculating benefits, Social Security looks at the entirety of your career, choosing the 35 highest-earning years after adjusting for inflation over the course of your work history. That means that in contrast to the way some public pensions work, earlier low-paying years can play an equally important role in determining your benefit as recent high-paying years.

For those who haven't worked a 35-year career, staying in a job longer can have a measurable impact on benefits. Even if you already have 35 years of work, staying in a high-paying job an extra year can replace an earlier low-earning year -- again depending on how inflation has behaved in the interim.

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5. Social Security rules can change at a moment's notice.
Understanding Social Security is hard, but even worse is the fact that once you think you have a rule down cold, it can change. Americans found that out late last year, when new changes eliminated the file-and-suspend option and restricted application strategy for most future participants.

Because your benefits aren't written in stone, you need to stay aware of potential program changes. That way, you can weigh in with your representatives to ensure that any concerns you might have are heard.

Social Security rules can be hard to follow, but they're important to understand. By knowing these five rules, you can do a better job of managing your retirement finances.


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.

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Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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