It’s likely that last thing a new college grad is going to want to do with their paycheck: use part of it to start a retirement account. After all, the concept of retirement may seem quite difficult (if not impossible) for an individual in their early to mid 20’s to fully grasp.
But the most reliable way to ensure a financially secure retirement is to begin retirement savings early. In fact, here are five reasons why it’s important to start an IRA early in life.
To Get Into The Habit of Saving. One of the most important reasons to start an IRA early in life is to get in the habit of saving. While this might sound like something that’s simple to achieve, there are many individuals and families that haven’t developed a strong savings habit. By beginning your IRA early, and making regular contributions to it, the process of saving becomes well ingrained in your lifestyle.
To Take Advantage of Time. The most reliable way to grow a savings or investment portfolio is to give it time. Even investments that only provide a relatively small rate of return can ultimately yield significant amounts when they are given decades to compound. For example, assuming a 7% rate of return, an individual who makes only 10 years of maximum contributions to their IRA beginning at age 25 (then makes no additional contributions thereafter) will have a larger account balance then someone who makes the maximum contributions for the 35 years period from age 35 to age 70.
To Save on Taxes. If you choose to set up a traditional IRA, then your annual contributions may be tax deductible (depending upon your level of income and whether you are covered by a retirement plan at work). If you choose a Roth IRA, then your annual contributions will never be tax deductible, but all withdrawals from your account during retirement (both contributions and earnings) will be tax free. Over the course of your lifetime these aggregate tax savings can be surprisingly significant.
To Have Greater Control Over Your Retirement Portfolio. Many individuals have access to other retirement savings vehicles, including the popular employer-sponsored 401(k) plan. But even if you are fortunate enough to have access to a 401(k) plan with employer match (and fewer 401(k) plans are offering this feature), you still need to consider how much investment freedom you have within the account. Many 401(k) programs are severely restrictive in terms of available investment options, and none will be able to match the options you now with a self-directed IRA.
To Have a Greater Sense of Well-Being. It’s important not to underestimate the value that a well-funded IRA can bring to your life by providing you with peace of mind. By having a self-directed IRA you’ll be able to take better control over the financial aspects of your retirement, and therefore reduce the stress that often comes with retirement planning.