Here’s a simple way to boast your retirement savings.
Contribute to your IRA at the beginning of the year. This will generate substantially higher returns than if you wait until after the year is over.
The reason is that money invested in January will take full advantage of the power of compound interest. Money you invest at the beginning of 2015 will earn interest throughout the year. Over the long run, money invested months early in the year will make a big difference in your retirement.
Let’s look at some examples:
Providers Kim and Teresa are the same age. They invest $5,000 each year in their IRA and earn the same rate of interest (5%) each year. Kim invests her $5,000 each January, while Teresa waits until April of the following year to invest her $5,000. This means Kim’s month is earning interest for 15 extra months (January 2015 – April 2016) each year.
After 30 years Kim has $16,000 more in her IRA and after 40 years she has $34,000 more.
If they both earned 9% (the historic long-term return of the stock market), Kim would have $75,000 more than Teresa after 30 years and $193,000 over 40 years.
What if Kim invested her money on January 1, 2015 for her 2014 IRA and Teresa invested on April 15th. Even the 3.5 month difference still adds up to $30,000 more in Kim’s pocket after 30 years and $45,000 over 40 years (at 9% a year).
Under all of these scenarios, that’s a lot of money!
It’s Not Too Late
If you in your 50s, it’s not to late to boost your retirement savings. If you are age 55 and you contribute $2,400 on January 1st each year for 10 years (earning 7% a year), you will have $273,000 at age 65.
So, when is the best time to start saving money for your retirement? Answer: Today! When is the next best time? Answer: Tomorrow!
Now is the time to contribute towards your 2015 IRA.
Tom Copeland – www.tomcopelandblog.com
Image credit: http://www.gotcredit.com/
For more about retirement savings and IRAs, see my book Family Child Care Money Management and Retirement Guide.