When it comes to saving for retirement, procrastination is the enemy. One of the most popular benefits of using IRAs for retirement savings is that you're allowed to make contributions at the last minute before filing your tax return and still receive a tax deduction. As a result, many people end up waiting until April of the following year before adding to their retirement accounts.
Unfortunately, that delay can be costly. Because of the special benefits that IRAs provide as well as the power of compounding, the longer you wait to get money into your retirement account, the less you'll have. Conversely, those who make just a single easy move can reap big rewards.
What a difference time can make
You can read a lot at The Motley Fool about how a long-term investing mentality can make such a huge difference in your portfolio's results. The power of compounding can turn even modest amounts of money into immense wealth. Over time, the longer you can wait, the more your money can grow. That makes it essential to put time on your side as quickly and often as possible.
In the moment, it's easy to think that putting off an IRA contribution for a few months won't make a massive difference. But the impact can be a lot bigger than you'd think.
Running the numbers
As an example, say that you make $48,000 a year and decide to set aside 10% of your salary in an IRA. Being a procrastinator, you wait to make your annual $4,800 contributions until April of the following year, just in time to get a tax break. Over the next 25 years, you successfully earn an average of 8% each year on your portfolio investments.
Using this strategy, you'd have about $369,000. Your contributions would add up to $120,000, and you'd essentially have tripled your money through investment returns.
Now let's see what happens if you make one simple change in the way you think about retirement savings. Instead of waiting until April of the following year to make your IRA contributions, say that you put that $4,800 to work right away each January as soon as you're allowed to make contributions for the given year. When you run the numbers there, you'll get almost $408,000 after 25 years -- $39,000 more, even though you make exactly the same amount of contributions to your account. All it took was giving your contributions that extra 15 months every year to work for you -- putting time on your side to boost your returns.
Splitting the difference
Admittedly, not everyone can come up with a $4,800 payment right at the beginning of the year. But there are more realistic alternatives that will still lead to a significantly bigger nest egg.
One of the most painless ways to save for retirement is just to do it automatically through regular withdrawals from your paycheck or bank account. Taking the same amount month in and month out will get you used to the idea of putting money toward saving as a priority, and eventually, you won't even miss the money going into an IRA.
To see how it works, take the example above and change it slightly. Rather than doing a $4,800 annual contribution all at once, say instead that you contribute $400 each month. When you run the numbers, you'll get a final nest egg of about $393,000 -- $24,000 more than you'd get if you waited until the last minute.
Make the most of your retirement savings
The sooner you start putting money aside for retirement, the better off you'll be. IRAs are a great way to save, and the best way to make maximum use of IRAs is to make contributions as soon as you can. The difference could be a lot bigger than you'd ever imagine.