Here's What Delaying IRA Contributions by 5 Years Might Do to Your Nest Egg

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  • It's a good idea to fund your IRA from as young an age as possible.
  • If you're a student with a job, it's a good time to start contributing to the account.
  • Delaying the process of investing could leave you with a lower ending balance.

To be eligible to contribute to an IRA, you need to have earned income. So if you're a full-time student without a job and you're given $200 as a birthday gift, you can't use it to make an IRA contribution.

But once you start earning money, you're eligible to fund an IRA. And it's a really good idea to do so from as young an age as possible.

The sooner you start contributing to an IRA and investing your money, the more opportunity you'll have for your money to grow. In fact, you may be surprised to see what an impact a five-year delay in IRA contributions has on your total nest egg.

Waiting could hurt you

When you invest money in an IRA (or a regular brokerage account, for that matter), you get the opportunity to load up on stocks. That could end up being very lucrative.

Stocks are known as a volatile investment, and so it's not a good idea to invest in them on a short-term basis. On a long-term basis, however, they can be a great bet.

Meanwhile, when you invest your money for retirement, you get to benefit from a concept called compounding. On a basic level, compounding is the concept of earning interest on interest.

In the context of your IRA, it could work like this: You buy stocks and earn a nice return on those investments. You then reinvest your gains to grow your IRA even more.

Now, you might assume that if you hold off on funding your IRA for just a bit of time -- say, while you get on your feet as a young adult -- that it won't really hurt you so much in the long run. But actually, you may be shocked at how much retirement wealth you might give up by holding off on investing in your IRA.

Let's assume you sock away $300 a month in your IRA for 40 years -- say, ages 27 to 67. The stock market has, over the past 50 years, rewarded investors with an average annual return of 10%, as measured by the performance of the S&P 500 index. So if you snag that same return in your IRA, you'll be looking at an ending balance of close to $1.6 million.

But watch what happens when you start funding that IRA five years earlier (in this example, age 22), thereby extending your investment window to 45 years instead of 40. In that case, you stand to retire with almost $2.6 million. That's roughly a $1 million difference at a cost of just $18,000 in extra contributions ($300 a month over a five-year period).

Fund that IRA as soon as you can

You can put as little as $100 into an IRA if that's all you can manage at first. But the key is to start somewhere, and to start young.

So if you're 16 years old and earning $800 from a summer job, put it into your IRA. And if you're 22 years old fresh out of college, sock $50 a month in your IRA if you need the rest of your paycheck to cover your living expenses.

When it comes to growing wealth in your IRA, your greatest tool is time. The sooner you can add money to that account, the more financially secure a retirement you stand to enjoy.

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