Leverage Your Future With A Roth IRA
Andrew Carnegie understood it; so did J.P. Morgan, and Cornelius Vanderbilt. These nineteenth-century American industrialists understood that money earning compound interest, left alone, could build a fortune very quickly. The power of untaxed compound interest building on itself is now within the reach of every American through a Roth IRA.
Savings which earns compound interest grows quickly because the interest earned is added back to the principle. Future interest is earned on the sum of (the compound of) both the principal and earned interest. When even small sums in a Roth IRA earn compound interest for a long time, it can add up to a small fortune. It pays to start saving early, and save regularly; but power of a Roth IRA works well whether you contribute regularly or not.
The Retirement Account Drop Out
Let’s consider Bob. Bob went to work for an auto dealership right out of high school. He contributed $2,000/year into his Roth IRA until he was 25, at which time he got married. The stresses and strains of raising a family kept him from making future contributions. He was, however, smart enough to keep his money in the IRA and not withdraw it. When Bob is ready to retire at age 65, his original investment of $14,000 will be worth (@8%) around $930,000. Yes, Bob’s Roth IRA account will enable him to retire nearly a millionaire, just from the few years in which he regularly contributed to his account.
The Single Mother
Sally became a single mother at age 40. She had a good job, but no retirement plan. The proceeds from her husband’s life insurance policy paid for her home, so she has no mortgage payment. She started a Roth IRA and will make monthly contributions of $300 for the next 30 years. In that period, her investment of $108,000 will grow to around $450,000; a four-fold increase in her contributions.
The Barber and the Banker
Doug and Alan grew up together and after high school both went into the Army. When they were discharged from the service, they both returned to their home town. Doug enrolled in barber school, and when he got his license he set up his own shop. He earned a modest living and raised a family. Alan went away to college, got his degree, then came home and went to work in the local bank.
Doug opened a Roth IRA account when he was 25, and contributed $100/month. Alan, upon Doug’s constant urging, opened a Roth IRA account and he, too, contributes $100/month.
When Doug reaches 65, his Roth IRA account will be worth $1,100,000; he will retire a millionaire. Alan’s account will be worth only $300,000. Waiting an extra 10 years to start making contributions to his Roth IRA cost Alan almost three-quarters of a million dollars.
In all the examples above, the money left in the Roth IRA account grew at a rapid pace. The longer the money was in the account, the greater it grew. The lesson is this: it is in your best interest to open a Roth IRA account now, and contribute as much as you can to it, as often as you can. You’ll be surprised how your money will compound.
