Any financial adviser worth anything will keep repeating this mantra over and over – contribute as much as you possibly can to your retirement accounts, starting right now. If you have a financial adviser and this advice doesn’t sound familiar, fire him immediately – he’s not looking out for your best interests. The power of compound interest is impressive, and even a few extra years can make a world of difference when it’s time to leave the working world and go fishing all day. Just take a look at a couple numbers I ran through a calculator, concerning Roth IRA’s. Please note that none of these numbers are adjusted for inflation, which can have a significant impact. They are also assuming a 9% rate of return. However, since the money comes from a Roth IRA, there are no additional taxes due at the time of withdrawal.
Investor 1 drops $4,000 into his Roth IRA at age 25, and leaves it be until retirement. At that time he’ll have a cool $144,439.60 balance. Compare that to Investor two who drops the same $4,000 into a Roth, but does so at age 45. His account balance will read just $24,036.6 at age 65 – a difference of over one hundred and twenty thousand dollars. The same initial investment in both cases, but 20 years apart – the difference is tremendous.
Here’s another scenario. Investor one contributes $100 per month to his Roth IRA, starting at age 25. His total contribution is $48000, and his account will reach a whopping $468132.02 at age 65. Investor 2 contributes $333 per month ( the max is $4,000 per year ) to his Roth, for a total contribution of $79,920 – almost twice what the first investor put in. However, #2’s account will read $222406.32 – less than half of investor one. Invest half as much and end up with twice as much – that’s how powerful compounding interest is.
There’s a lot of details to learn about investing, and inflation is one that you can’t forget – but that’s a topic for another post. The bottom line, and something you need to take to heart is this – Begin investing for your retirement right now, today, this minute. If you have a Roth IRA, put some money into it. If you don’t have a 401(k) , OPEN ONE. Whatever your retirement investment of choice is, start right now.
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