At any age, sav­ing for retire­ment is and should be a very high pri­or­i­ty.  The con­cept is easy; start ear­ly, save as much as you real­is­ti­cal­ly can, and put your mon­ey into a diver­si­fied port­fo­lio, is and always has been crit­i­cal to being pros­per­ous in retire­ment.  One aspect that is often over­looked is the tim­ing of when you actu­al­ly make your invest­ments.    


For exam­ple, finan­cial­ly savvy peo­ple make it a habit of con­tribut­ing the max­i­mum allowed to a Tra­di­tion­al or Roth IRA every year.  How­ev­er, WHEN that con­tri­bu­tion is made will def­i­nite­ly have an impact over how much is accu­mu­lat­ed over a life­time.  For IRA’s, peo­ple can con­tribute to an IRA at any time dur­ing the cur­rent year or up until the tax fil­ing dead­line in mid-April of the fol­low­ing year.  That’s a 15 ½ month dif­fer­ence between your first chance to and your last chance to make an IRA con­tri­bu­tion.     


To highlight the impact of investment timing, let’s consider the following two scenarios: 

Sarah has a Roth IRA.  On Jan­u­ary 1st, each and every year with­out fail, she faith­ful­ly con­tributes $5,500 (the max­i­mum allowed for 2014) into her IRA. 

On the oth­er hand, Bill, who also has a Roth IRA, waits until he is about to file his tax return for the pri­or year to con­tribute the same amount to his IRA.  Basi­cal­ly, he is wait­ing 15 ½ months before he con­tributes to his IRA. 


Now, both Sarah and Bill are finan­cial­ly savvy.  They are con­tribut­ing the max­i­mum to their IRA’s each and every year.  Because they focus on prepar­ing for their future finan­cial safe­ty, they will both retire with funds suf­fi­cient to live a full and reward­ing retire­ment.  How­ev­er, Sarah will have sig­nif­i­cant­ly more mon­ey in her retire­ment fund than Bill.  Why?  Because she fund­ed her IRA imme­di­ate­ly, ver­sus wait­ing 15 ½ months like Bill, her con­tri­bu­tions start­ed appre­ci­at­ing soon­er and for a longer peri­od of time than Bill’s con­tri­bu­tions. 


Let’s look at the num­bers.  Both Sarah and Bill con­tribute $5,500 every year for 31 years.  Both of their IRA’s are invest­ed in a diver­si­fied port­fo­lio con­sist­ing of stocks, bonds and cash and appre­ci­ate, on aver­age, 7% per year.  At the end of the 31 year peri­od, both have con­tributed exact­ly the same amount of mon­ey or $170,500 (31 years x $5,500).  But, at the end of the 32 year peri­od that is cov­ered, Sarah has $612,796 ver­sus Bill’s $561,402.  She has earned almost $51,400 more than Bill.  And the only dif­fer­ence is when they con­tributed to their IRA.  

 bill & sarah roth ira - corrected

As you can see, it is much bet­ter to invest mon­ey soon­er rather than lat­er.  Being finan­cial­ly savvy not only requires tak­ing advan­tage of most, if not all, of your retire­ment sav­ings oppor­tu­ni­ties, but also mak­ing sure you con­tribute as ear­ly as is rea­son­ably pos­si­ble to ensure you max­i­mize your retire­ment sav­ings. 


Finance and account­ing are not a set of rules.  They are actu­al­ly tools that you can use to cre­ate the life you want.  It’s about know­ing how and when to the best tools for you.