The Importance of Making the Maximum IRA Contributions

Many investors fail to meet their maximum IRA contribution limit each year. While this is common, it is definitely not in your best interests when saving for retirement. Here are a few things to consider about the importance of making the maximum IRA contributions. Making the maximum IRA contribution for the year is important, but you first need to understand what they are. If you are under the age of 50, the maximum contribution for the year to your IRA is $5000. If you are over the age of 50, then you can contribute $6000 per year to catch up. 

Importance of Making Maximum Contribution

Many investors that are saving for retirement start slowly with their IRA contributions. This is understandable and it makes the transition easier. However, if at all possible, you should go ahead and make the maximum contribution each and every year. The longer that you wait to make your maximum contribution, the harder it is going to be to meet your retirement goals. 

Think about how much money you would like to have in your account once you retire. Many people suggest $1,000,000, at a minimum. While this is a lot of money, it is definitely not as big of a number as it used to be. Now, you should shoot for $1,000,000 as a place to start for your retirement. By the time you reach the age of retirement, there is no telling how bad inflation might be and $1,000,000 might be worth only a fraction of what it is today. 

An IRA example

For example, let's say that you start an IRA at the age of 20. You work every year without stopping until you reach the age of 60. For most people, this would represent a good working life. Every year, you contribute the maximum of $5000. You also earn a rate of return of 8% every year for the entire life of the IRA. While this may or may not be realistic, it will give you an idea of how difficult it can be to save for retirement. At this rate of saving and investing for 40 years, you would have about $1,400,000. This gets you over the $1,000,000 mark for your retirement. However, not many people start maxing out their IRA at the age of 20 and do it faithfully every year for 40 years. You could improve those totals if you were to get a higher rate of return, however, there are no guarantees that you will be able to. 

In comparison, let's use another example of someone that gets started late and does not contribute the full amount to their IRA. Let's say that they wait until they are 30 years old and decide to only contribute $3000 instead of the full $5000. With the same rate of return and retiring at the age of 60, you would only have $367,000 in your IRA. This represents a pretty big difference in your retirement dollars.

As you can see, you should try and max out your IRA every year, without exception if you want to enjoy a comfortable retirement. 

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