At this point in most millennials’ lives, the thought of retirement – and especially saving for retirement – probably doesn’t even crack the list of Top 10 priorities.
With all the other immediate financial obligations – student loans, car payments, and possibly saving for a down payment on a house, just to name a few – it’s hard to even grasp the idea of setting aside money for a point in life that’s 30 or 40 years away.
But the fact that retirement is such a distant thought is the exact reason you should start saving for it today.
Thanks to compound interest, time is by far your greatest asset when it comes to investing for retirement. The earlier you start saving; the better off you’ll be in the long run.
Assuming your contributions grow annually at 6% and your goal is to retire by the age of 65, saving $1.00 when you’re 20 is equivalent to saving $2.00 when you’re 30, $4.00 when you’re 40, and $9.50 by the time you reach age 50.
Outside of contributing to your employer’s retirement plan if available, millennials have the option of contributing to either a Traditional IRA or Roth IRA, with the latter – in most cases – a wiser choice for younger workers.
Contributions to a Roth IRA are taxed when they’re earned, which means you’ll be able to withdraw both contributions and earnings tax free when you reach age 59 ½. On the other hand, contributions to Traditional IRAs are tax-deductible, meaning you’ll pay income tax on both contributions and earnings. Assuming both marginal tax rates and income will rise over your lifetime; paying tax today is a wiser choice than paying a higher tax in the distant future.
However, there are income limits for making contributions to IRAs. For 2015, individuals filing a tax return on their own are only able to contribute to a Roth if their AGI (Adjusted Gross Income) is less than $116,000. If married and filing jointly, the income limit is $183,000.
The rule for Traditional IRAs is similar, but only applies to your ability to deduct your contribution from taxes, not your ability to contribute to the account. Assuming you are covered by a retirement plan at work, you are able to deduct your contribution if your AGI is less than $61,000, or if married and filing jointly, the income limit is $98,000.
Even though the calendar has turned, it’s not too late to make your contribution for 2015. You have up until April 15, 2016 to make 2015 retirement contributions.
Just remember, it’s never too late to start saving for retirement. Time is by far your greatest asset – use it wisely.
Looking for more retirement or general savings advice? Contact me at Concannon Wealth Management at 610-814-2474 or slinder@cwm.us.com.
