The Best Time To Start Saving For Retirement (With & Without Debt)

The end goal for just about every investor is to save enough money to one day leave the workforce.

Or, if an investor has already reached retirement (which happens at 61 on average in the US), to continue to earn enough through their investments to live comfortably without having to work.

But how does one get there?

The answer to that question is saving throughout one’s working life with discipline and a long-term view.

Indeed, the question of when one should begin saving is an easy one to answer.

The power of compounding returns means you should begin saving for retirement as soon as possible.

This gives you the best chance of having enough money set aside for retirement when the time comes and thereby increases the chance of producing enough income to live comfortably in retirement years.

Note on investing and debt:  The question of if you should save while still carrying debt (or a mortgage) is related.  Having personal debt and/or a mortgage while also investing is virtually the same as using leverage to invest in stocks from a personal balance sheet perspective.

The short answer is that you should pay off all high-interest rate debt (especially credit cards) before investing.  Long-term debt at a low-interest rate (like a mortgage) doesn’t need to be paid off before you invest, as it has the requirements needed to be ‘good debt’ in that it is (1) non-callable and (2) almost certainly carried at a low-interest rate.

With that said, it’s hard to overstate the power of compounding and therefore the importance of investing as soon as possible.

The Magic of Compounding

Compounding is the process whereby prior investment gains see additional gains in the future. For example, suppose an investor invests $10,000 in a stock and that stock returns 10% in the first year. The investor now has $11,000 thanks to the $1,000 in returns. In the second year, the stock returns another 10%, but instead of the investor earning the same $1,000 as year 1, the investor earns 10% on the earnings from the prior year as well, bringing total returns to $1,100 for year 2. When we extrapolate this process out over many years, the evidence is clear that the correct time to begin saving is as quickly as practicable.

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