The Benefits of Starting an IRA Early

Starting an IRA can be a very important part of your financial future. The earlier that you start an IRA, the better off you will be in the long run. Here are a few of the benefits of starting an IRA early in life.

Start Good Habits

One of the most difficult things about saving for retirement, is getting in the habit of doing so. Many people have great intentions of starting a retirement account and funding it for many years. They have visions of retiring with millions of dollars in their portfolio. However, when it comes time to put this in place, many people never get around to it.

Many people use their savings to get married, purchase a house, or have children. At that point, saving for retirement is no longer a priority. By setting up an IRA as early as possible, you can develop the habit of saving regardless of what happens in life. 

Compound Interest

Albert Einstein once said, "The most powerful force in the universe is compound interest." While this was meant in jest, it definitely has a lot of truth to it. If you start saving early in life, compound interest can make it possible for you to retire with a sizable portfolio. Therefore, you want to start saving and accumulating compound interest as soon as you possibly can. The difference that it can make is astounding.

Here's an example to help you understand the power of compound interest in your IRA. Let's say that you start investing in an IRA at the age of 20. You decide to contribute the maximum amount of $5000 right away and you do so every year for the next 40 years. This will put you retiring at the age of 60, which is only six months after you can start withdrawing from your IRA without penalty. Let's say that you earned an average of 8% per year over the life of this investment. By saving $5000 a year for 40 years, you have only contributed $200,000 of your own money. However, at this rate of return, you would have $1,399,000 in your retirement account. Just by putting away a regular investment in your IRA, you are able to save almost $1.4 million for retirement.

Investing Aggressively

When you start saving for retirement early, this gives you more flexibility in the types of investments that you can choose. Most financial advisors will recommend younger people to experiment with slightly riskier investments in order to try and build their capital faster. As you get older, the more conservative you have to be in order to preserve your retirement funds. The fact that you have many working years left makes it much easier to make up for investing mistakes along the way.  

Tax Advantages

When you contribute to an IRA, you will be able to deduct the amount of your contribution from your taxable income. This provides you with a very nice tax break if you choose to partake. By getting started with an IRA early, you will be able to save more money in taxes in the long run. 

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