Most people are notoriously bad at saving for their retirement. In fact, over 45% of people have nothing saved for retirement. Despite the fact that the sooner you start saving the less you will need to save to achieve the same outcome, people still wait well into their 40s and beyond before they start making regular substantial contributions to their retirement savings.
It may take a bit of discipline to get your spending under control, but your IRA is designed to encourage starting early and making steady payments into your retirement account.
According to the retirement experts, these are the 3 reasons why you should be maximizing your IRA or 401(k) contributions.
The Magic of Compound Interest
Compound interest is a powerful yet simple concept that is often overlooked by the average person when they are planning for their retirement. Compound interest occurs when the interest on capital is reinvested for subsequent periods. While this may not sound like much for the first few compounding periods, the impact of compound interest increases exponentially as the number of compounding periods increases.
Therefore, you want to have as much money as possible accruing compound interest as early as possible in your career. The sooner you start saving and the more that you save, the more the power of compound interest can make your money work for you and allow you to contribute less overall in the end for the same outcome.
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Tax Deductible
Any contribution that you make to your traditional IRA account is tax-deductible. This means that you can save all of the contributions you put into your savings account which leads to a dramatic increase in the amount saved as you avoid paying income tax until you decide to take the money out again.
When the impact of compound interest is added in, the additional savings that you will make from maximizing your IRA contribution will be enormous. Instead of your income going right to the government, it can sit in your IRA account building compound interest for years or decades until you decide to retire, draw down your savings and pay out the deferred taxes that you owe on the original sum.
A Better Retirement
If you think that you hate your job now, imagine how much more you will hate it when you are still stuck there at 60…or perhaps even 70. While it is tempting to live the good life now and deal with the future when it comes, people who fail to adequately save for their retirement report some of the lowest standards of life satisfaction. Simply put, slaving away in your 60s and 70s is a miserable experience.
Simply maximizing your IRA contributions is the easiest way to be sure that you will have more than enough money to retire early and live comfortably, without having to work late into your life or make drastic cuts in your living standards. Maximizing your IRA contributions is such a safe, simple, and effective means of ensuring a comfortable and timely retirement that there is absolutely no excuse for not doing it.
>>Any contribution that you make to your traditional IRA account is tax deductible. <<
Only below certain income limits.
I stuffed as much as I could in IRAs (and 401ks), but later I needed cash for home down payment, but it was hard because most of my assets were in tax-deferred accounts. So don't neglect cash savings too.
I max out my Roth IRA every year and that allows me to access my contributions if need and all the growth will be tax free when I pull it out later in retirement. I also prefer to have control over my money later with no Required Minimum Distributions. This is my birthday present to myself every year!