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.