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Richard Shaw:

It's easy to convince yourself that saving for retirement can wait when you're in your 20s or your 30s. You might say to yourself, in 20 years, I'll be further along in my career or earning more. I'll be able to save more and make up for lost time. That might sound good.

That train of thought doesn't go very far. Why is that? Because retirement planning isn't just about money. It's about another precious resource you can't get back—

Time. Compounding is the first way time impacts your retirement. When you save for retirement, you usually put funds into a retirement account. These are typically tax-advantaged accounts like a 401(k) or a traditional or Roth IRA.

You'll then use the funds to make investments, typically in stocks and bonds. Your investments in the stock market will go up and down in the short run over days, weeks, or months. But over years or decades, based on history, your investment is expected to trend upward. In fact, over the last 50 years, the average return on the stock market is 10%, assuming reinvestment of dividends.

So the money you put in your retirement account in your 20s should grow in a big way over time. Initial gains will be reinvested to create an even larger amount. And that larger amount earns even more. This continues year after year.

That's compounding. And it can be incredibly powerful. I like to think of compounding like rolling a snowball down a hill. It gets bigger and bigger the longer you let it roll.

It's pretty amazing. Albert Einstein called compounding the eighth wonder of the world. Here's an example. Let's say you put $10,000 into your retirement account at age 25.

A year later, assuming a 10% return, your $10,000 investment will have become $11,000. That might not sound like a lot, but it is. In 40 years, at age 65, your $10,000 investment will have grown to roughly $450,000. Wow.

But what happens if you wait before you start investing? Instead of starting at age 25, you wait until you're 40. But to make up for those lost years, you invest $30,000. Your investment will only have 25 years to grow in the market, not 40, and will only be worth about $325,000 by the time you turn 65.

Even though you invested three times more at the outset, you end up with almost $125,000 less. Of course, these are simplified examples to illustrate how compounding works. Returns can vary, and we haven't considered fees or taxes.

So here's the point. Time is your friend when it comes to compounding. But time also exerts an opposing and less friendly force on your retirement planning. And that's through inflation.

Just as the stock market trends upward, so has the cost of goods and services. Fortunately, inflation tends to move slower than stocks, increasing about 4% a year on average over the last 50 years. If you are invested in the stock market and you're earning a 10% return, your earnings are outpacing inflation. However, the reverse is also true.

For every year you wait, you're not just missing out on those 10% returns, you're also getting squeezed by that 4% rise in inflation. Let's go back to our initial example. You don't invest $10,000 at age 25 and instead wait until you're 40 to invest $30,000. Inflation will erode your money's value in those 15 years.

After accounting for a 4% annual pressure from inflation, your initial $30,000 investment is only worth about $17,000 in current dollars. Why plan for retirement now? It all comes down to time. Compounding happens over time.

The sooner you invest in a retirement account, the longer your money has to grow, be reinvested, and earn even more money. Inflation also rises over time. When your money isn't earning money, it's losing value compared to the cost of living. So there you have it, two simple but compelling reasons to begin saving for retirement as early as possible.

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