As we move further into 2015, investors still have several weeks left to make retirement account contributions for 2014. Many accounts allow you to make a contribution for last year all they way through April 15th of this year.
Max Out Retirement Contributions
Funding your retirement account is not always the first thing on an investor’s mind, as it is a relatively lackluster activity. But the power of making the maximum contributions each year is often overlooked. The table below shows the value of a retirement account for two different investors: Investor 1 makes maximum contributions each year to his/her account, while Investor 2 only makes half of the max contributions.
This table assumes a maximum annual contribution of $5,500 (standard for many IRA accounts today) with an annual growth rate of 7%:
| Years | Investor 1 | Investor 2 |
|---|---|---|
| 0 | $5,500 | $2,250 |
| 5 | $33,338 | $13,638 |
| 10 | $80,602 | $32,974 |
| 15 | $146,892 | $60,092 |
| 20 | $239,866 | $98,127 |
| 25 | $370,268 | $151,473 |
| 30 | $553,163 | $226,294 |
| 35 | $809,682 | $331,234 |
| 40 | $1,169,465 | $478,417 |
| 45 | $1,674,078 | $684,850 |
| 50 | $2,381,824 | $974,382 |
The diversion starts off slow, but as the years progress, Investor 1 (the investor that maxed out his/her portfolio each year) clearly begins to pull away. Compounding returns begin to take effect and the higher contributions only build a stronger base to work from.
Self-directed investors who manage their own portfolios can easily get wrapped up in market news and short-term movements or their positions, often overlooking their retirement accounts. Contributions only become more powerful if you are involved in a matching plan, where a company matches up to a certain point each year. This is more or less free money that some leave on the table every year.
Be sure to read our Guide to a Free Lunch on Wall Street.
Retirement is most certainly a major goal in any investor’s life, and with the new normal of many working past the age of 65, sound investment can help you hit your retirement goals on time or perhaps even early. Take a look at any retirement accounts you have and ensure that you have reached your contribution limit for 2014; if you have not, take these next few weeks (assuming the account allows it) and hit that limit to better prepare yourself for later in life.
The Bottom Line
Making the maximum contribution can sometimes be a tall order, as you may need to spend your money elsewhere throughout the year. But when it comes to investing, if you are financially able, you should always make the biggest contribution possible on an annual basis.
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