Convincing 20-Year-Olds to Make Roth IRA Contributions

Many people in their twenties are not thinking about retirement. Most are starting careers, maybe getting married, and probably struggling to balance responsibilities and paying bills. Annual Roth IRA contributions are normally not high on the priority list for someone who is 25 years old. However, there are tremendous advantages to making Roth IRA contributions a priority at a young age.

First of all, the small amounts saved when people are in their twenties have time to grow and take advantage of compounding. Compounding is when earnings and interest earned on a deposit accumulate and are reinvested. The result is the investment grows exponentially over time. Investors in their twenties may not have much money to save, but they have time on their side. Generally, a person is more likely to meet the income limitations for making Roth IRA contributions at a younger age. If investors wait too many years, they may miss the opportunity to make Roth IRA contributions at all because their income eventually exceeds limitations.

Consider the following example: A 25-year-old investor makes a one-time contribution of $5,000 to a Roth IRA. The contribution grows at 10% annually with all earnings and interest reinvested until age 60. At that time, the contribution made at age 25 has grown to an estimated $140,512. For comparison, look at the following table.

As you can see, delaying the start of retirement saving for even a few years can greatly reduce the deposit’s growing potential. To sum up this argument, if a 25-year-old investor forgoes making an IRA contribution to take a $5,000 vacation, the cost of that decision in the long run will be $140,512. It is important to weigh the full cost of these choices and to decide if it is worth the price.

If the first argument did not convince you, think about the following example: Let us assume that the following investor contributes $5,000 annually to a Roth IRA for 10 years during their twenties, thirties, forties or fifties. Again, we assume a 10% annual growth rate.

Again, delaying retirement savings until one is older comes at a big cost. Those that start saving for retirement later in life miss out on years of compounding. In the above table, an investor who waits until age 30 to start saving, ends up with $1,033,821 less than someone who starts at age 20.

Lastly, here is one more scenario for those not convinced: The table below shows how much an investor, starting at different ages, would need to save annually through age 59 to accumulate an account balance of approximately $2,434,259. We assume a 10% annual growth rate.

The table shows that starting the habit of saving early allows you to save less annually and still reach the same goal. Also, it may help you take advantage of tax-deferred accounts. For instance, a young investor saving $5,000 this year can make an annual Roth IRA contribution. Someone who is 50 years old and saving $138,853 this year, can make a $6,000 IRA contribution and a retirement plan contribution. For the sake of this example, let us assume the 50-year-old has a SEP-IRA and can contribute $45,000. When retirement plan contributions are maximized for the year, the remaining $87,853 will have to be saved to taxable accounts.

It certainly can be a struggle to come up with Roth IRA contributions when you are young, but the end result should be very rewarding. Young investors saving small amounts of money each year can take advantage of compounding over a long period of time. Henssler Financial believes you should Live Ready. That means considering the full weight of your spending habits and purchases, and striking a balance between saving and enjoying your money.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.