For a lot of people, the dawn of a new year feels like hitting the reset button -- and when it comes to saving for retirement, it actually is. On Jan. 1, we all start at $0 in annual IRA contributions, and we have the whole year to contribute up to the limit. In 2022, that's $6,000 for adults under 50 and $7,000 for adults 50 and older.
Saving that much can be a tall order for some, but here are 45,674 good reasons to try this year.
How much are your dollars really worth?
It's easy to think a dollar is just a dollar, and that's true if you plan to spend it today. But if you invest your dollars, they can end up being worth a lot more in the long run.
If you contribute the $6,000 maximum to your IRA or Roth IRA this year, that money could grow into $45,674 in 30 years, assuming a 7% average annual rate of return. And that's if you don't contribute any more money in subsequent years.
Those who make a habit of contributing $6,000 per year to their IRAs every year would have over $588,000 by the end of 30 years, again assuming a 7% average annual rate of return. That may not be enough to cover all of your retirement expenses, but it will certainly go a long way.
Too often, people just see the money they'd be giving up today if they stashed it in a retirement account, but they usually don't realize how much more they're giving up by not doing so. The reason small contributions are able to grow so much is because they're invested for decades, and interest compounds over time.
If you invest $6,000 for one year and earn a 7% annual rate of return, you'd end up with about $420 in earnings, for a savings total of $6,420. But if you left that money invested for another year and you also earned a 7% annual rate of return, you'd end up with about $6,869 -- nearly $450 more than you had before. The extra $30 is the return you earned off the $420 return from the previous year.
The longer you invest, the more significant an effect this compounding has. When your money isn't invested for as long, you can't count on your investment earnings to help you out as much. That means you need to contribute more of your personal savings each month to achieve your retirement goals.
Making a regular habit of maximizing your IRA is a great first step to bulking up your retirement savings. But this isn't always easy to do.
How to max out your IRA every year
Since IRAs allow one-time contributions, unlike with 401(k)s, you can choose how you want to fund your account. You might choose to budget $500 every month and set up automatic contributions so you don't have to think about making them. Or you might choose to contribute a smaller monthly amount and then make larger contributions sporadically as you're able to.
It's important to make a monthly savings habit even if you're not sure you'll be able to hit the $6,000 goal. It's too easy to think that you'll set aside the $6,000 at the end of the year, but if you're not budgeting for it, you might inadvertently spend it.
Figure out how much you can afford to set aside each month, and then look over your budget to see if there are any opportunities to free up more cash. Comb through your bank and credit card statements to look for monthly subscriptions you forgot about or areas of overspending where you could cut back. Then, funnel the money you're saving every month to your IRA.
Consider stashing one-time payments like birthday money, tax refunds, and performance bonuses into your IRA rather than spending it. Or you could budget half for spending and half for saving.
And if that's not enough, consider looking for ways to bring more money in. This could mean asking for a raise, switching employers, or starting a side hustle. Think about what works best for you and then try it out.
Just be sure to keep track of how much you've already contributed to your IRA. If you accidentally exceed $6,000, you could face penalties. If you'd like to set aside more money than your IRA allows, consider using a different type of retirement account, like a 401(k) or a self-employed retirement account if you have a side hustle.
It may not always be easy to lock your money away for retirement every month. But if you focus on why you're doing it and how much that money could be worth in the future, it should be a little easier.