E Individual Retirement Accounts - Why Starting Young Makes A Difference

After spending years as a loan officer I became quite comfortable with explaining the differences between two popular Individual Retirement Accounts (IRAs) - Traditional IRA and Roth IRA. Although my primary job was to originate credit cards, auto loans, and home equity lines of credit I always felt compelled to encourage my customers to begin saving sooner rather than later because I learned from a young age just how important it is to begin saving for retirement as soon as possible. When it comes to IRAs, there are three primary reasons why it's so important to save for retirement as soon as possible:

  1. The amount that you can contribute on an annual basis is limited and makes every year that passes a wasted opportunity to invest.
  2. The sooner you make a contribution the more time it has to begin compounding gains.
  3. The more years you have to invest the better chance you will achieve a reasonable average return.

1. Limitations to Contributions

Let's assume that you plan to retire at the age of 65 and began working at the age of 22. This means that you have 43 years to amass the quantity of wealth that you will need to sustain your lifestyle going into retirement. Any year in which you do not make a contribution reduces the total number of years because there is no way to go back and contribute funds (unless it is prior to April 15 of the current year). For example, if I want to contribute money to my Roth IRA for 2018 I would still be able to do so until after April 15, 2019, has passed.

  • Currently, the maximum you can contribute to an IRA is $5500/year although at age 50 that amount moves up to $6500/year. Therefore, under the first tier ($5500/year), an investor in this situation would be able to save a maximum of $154,000. Under the second tier ($6500), an investor would be a to save a maximum of $97,500. In total, an investor following this scenario would only be able to put away a maximum of $251,500 over the course of their working career.
  • Every year that passes before the age of 50 means that you are forgoing 2.2% of the total amount you could've potentially invested.

At this pace, it would only take 4.5 years of missed contributions to have eliminated 10% of the total amount you can contribute during your lifetime. This becomes especially important for investors that do not have a 401(k) or alternative retirement source through their employer.

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Angry Old Lady 6 months ago Member's comment

Too late for me :(

Bindi Dhaduk 6 months ago Member's comment

You've convinced me!

Ayelet Wolf 6 months ago Member's comment

Very true.

David P. Goldsmith 6 months ago Member's comment

Excellent article. Due to downsizing, I lost my well paying job a couple years ago. Have had to settle for far less since. Been trying to avoid making the family feel the difference so starkly so the first thing that got were my IRA contributions. This weighs on me daily knowing how compounding the loss is.