Is saving for retirement keeping you up at night? Don't worry. The Motley Fool's IRA Center has you covered. In the meantime, here are three tips that can help you build a bigger IRA, so that you can rest easier in retirement.
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No. 1: Contribute at the beginning of the year, not the end of the year
Many Americans make their contribution to their traditional or Roth IRA at the end of the year or in the following year when they submit their tax returns in April.
If you're among them, you might be leaving money on the table. By delaying your contribution to your IRA, you could be missing out on 12 months or more of market returns. In turn, that means that you could be also missing out on long-term benefits associated with compounding interest on those missed returns.
Therefore, to make the most of your IRA and to capture the biggest benefit from compound interest, consider investing your contribution on Jan. 1 every year. Or, if money's tight, perhaps divide your contribution by 12 and make your contribution in equal monthly amounts throughout the year. In 2017, you can contribute up to $5,500 in earnings to either a traditional or Roth IRA, which works out to about $458 per month.
No. 2: Embrace catch-up contributions
Once you reach 50 years old, the IRS lets you contribute an extra $1,000 of your earnings to a traditional IRA or Roth IRA every year, and that extra $1,000 catch-up contribution can really add up.
For example, let's assume Jim is 50, and he already has a IRA valued at $100,000. If Jim contributes $5,500 to his IRA every year, and he earns a hypothetical 6% average annual return, he will end up with a retirement nest egg valued at $367,673.64 at age 65. However, if he contributes $5,500, plus an extra $1,000 catch-up contribution, then his IRA could total $390,950.60 at age 65.
Even better, those extra contributions pay off as you get deeper into retirement.
For instance, if Jim makes his contributions to a Roth IRA, which doesn't require minimum distributions at age 70 1/2 and he doesn't touch his IRA, then he could end up with $936,936 at age 80 under the $6,500 contribution scenario, which is $55,784.47 more than he would have if he had only contributed the $5,500 annually between age 50 and 65. That's not chump change.
No. 3: Manage fees and embrace long-term investing
One of the best ways to end up with a bigger IRA in retirement is to approach retirement investments with a sharp pencil and long-term thinking. Expenses for investments held in IRAs can reduce retirement savings substantially, so make sure that you consider low expense options, such as exchange-traded funds and individual stocks, rather than more expensive mutual funds.
Investing in low-cost options can add thousands of dollars to your IRA balance over time.
For example, over a 30-year period, a $100,000 investment earning a hypothetical 6% per year would grow to $574,349.12. However, if expenses reduced that return by 1% to 5% annually, then your IRA's value would drop to $432,194.24.
Undeniably, there's no free lunch, so you'll have to pay something in the way of expenses. However, if you can find investments delivering similar returns at a lower cost, make sure you embrace them. For example, the expense ratio of Vanguard's S&P 500 index fund is a scant 0.16%, which Vanguard claims is 84% lower than the average expense ratio of funds with similar holdings.
Furthermore, investing in disruptive companies that can reward your portfolio for decades, rather than months, can cut expenses tied to transaction costs by reducing the turnover. Finding great stocks for the long term (and sticking with them through thick and thin) requires time and research, but when you find them, they can pay off big. For instance, Amazon.com's shares are up 6,830% since 2001. Imagine how that return has boosted IRAs values over the past 15 years.
