Retirement Accounts, (IRAs, Roth IRAs, 401K) – Part 1. Why you should start a retirement account TODAY

On May 5, 2012 by Andy Bandy Man

Are you tired of your Dad / Uncle / Jim Cramer telling you that you should be investing for retirement, which is 40+ years away? Are you sick of going online to research Roth IRAs, only to end up watching YouTube videos? (Sorry. Couldn’t resist)

Well you aren’t alone. I missed out on several perfectly good years to start contributing to my retirement accounts, simply because I didn’t know where to start. I agonized over the pros and cons of the Roth IRA and the Traditional IRA, and ended up having No IRA. Well, today I’m going to tell you WHY you should open a Retirement Account ASAP.  Tomorrow we’ll talk about how to do it.

 

WHY DO OLD PEOPLE LOVE TO TELL YOU ABOUT RETIREMENT ACCOUNTS?

It’s because Uncle Sam is actually giving you an awesome deal.  Don’t believe me?  Let’s look at the numbers, assuming you invest $10,000 today (this is just an example number, same principle applies if it is $100):

  • Retirement account: You don’t have to pay taxes on your earnings AND profits are automatically re-invested.  Therefore, your little $10,000 will turn into $93,173 after 30 years (assuming 8% profit every year).
  • Regular account: If you just save the money in your bank, your profits will be taxed every year. I will assume in this case that you have the willpower to re-invest the profits. Well assuming 25% taxes, your $10,000 will be $54,184 after 30 years.
  • Regular account without re-investment: In the worst scenario, you save money in your bank  meaning you have to pay taxes. But in this case, you also don’t have the willpower to resist taking out some profits to buy pizza and beer (I assume you therefore contribute a fixed 8% of your initial investment, or $800 minus taxes, every year). At the end of 30 years, you will only have $27,400… less than 30% of what your retirement account has

 

CONCLUSION: START A RETIREMENT ACCOUNT ASAP

So the old people are right – a retirement account allows your money to grow WAY faster than it otherwise would. If you think working is bad now, imagine having to slog to the office when you are 65 years old.  Further, the economic cost of delaying your retirement contributions is significant. In the example above, if you delayed your initial $10,000 contribution by 5 years, it would have cost you almost $30,000 – instead of having $93,173 after 30 years, you would only end up with $63,412.  So, it’s important to act NOW.

Tomorrow we’ll talk about what retirement accounts are and how to invest in them – click here to go to PART 2.

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