Convincing People in Their Twenties
to Make Roth IRA Contributions
The Henssler Financial Group Position Paper

Many people in their twenties are not thinking about retirement. Most are starting careers, maybe getting married, and probably struggling to balance responsibilities and paying bills. Annual Roth IRA contributions are normally not high on the priority list for someone who is 25 years old. However, there are tremendous advantages to making Roth IRA contributions a priority at a young age.

First of all, the small amounts saved when people are in their twenties have time to grow and take advantage of compounding. Compounding is when earnings and interest earned on a deposit accumulate and are reinvested. The result is the investment grows exponentially over time. Investors in their twenties may not have much money to save, but they have time on their side. Generally, a person is more likely to meet the income limitations for making Roth IRA contributions at a younger age. If investors wait too many years, they may miss the opportunity to make Roth IRA contributions at all because their income eventually exceeds limitations.

Consider the following example: A 25-year-old investor makes a one-time contribution of $4,000 to a Roth IRA. The contribution grows at 10% annually with all earnings and interest reinvested until age 60. At that time, the contribution made at age 25 has grown to an estimated $112,410. For comparison, look at the following table.

Investor's Age	Amount Saved	Amount at Age 60 (10% Growth Rate)
25	$4,000	$112,410
30	$4,000	$69,798
35	$4,000	$43,339
40	$4,000	$26,910
45	$4,000	$16,709
50	$4,000	$10,375
55	$4,000	$6,442

As you can see, delaying the start of retirement saving for even a few years can greatly reduce the deposit's growing potential. To sum up this argument, if a 25-year-old investor forgoes making an IRA contribution to take a $4,000 vacation, the cost of that decision in the long run will be $112,410. It is important to weigh the full cost of these choices and to decide if it is worth the price.

If the first argument did not convince you, think about the following example: Let us assume that the following investor contributes $4,000 annually to a Roth IRA for 10 years during their twenties, thirties, forties or fifties. Again, we assume a 10% annual growth rate.

10-Year Period of IRA Contributions	Annual Amount Saved	Balance of IRA at Age 60
Ages 20-29	$4,000	$1,345,997
Ages 30-39	$4,000	$518,940
Ages 40-49	$4,000	$200,074
Ages 50-59	$4,000	$77,137

Again, delaying retirement savings until one is older comes at a big cost. Those that start saving for retirement later in life miss out on years of compounding. In the above table, an investor who waits until age 30 to start saving, ends up with $827,057 less than someone who starts at age 20.

Lastly, here is one more scenario for those not convinced: The table below shows how much an investor, starting at different ages, would need to save annually through age 59 to accumulate an account balance of approximately $1,947,407. We assume a 10% annual growth rate.

Starting Age	Annual Contribution Amount	Account Balance at Age 60
20	$4,000	$1,947,407
30	$10,763	$1,947,407
40	$30,910	$1,947,407
50	$111,083	$1,947,407

The table shows that starting the habit of saving early allows you to save less annually and still reach the same goal. Also, it may help you take advantage of tax-deferred accounts. For instance, a young investor saving $4,000 this year can make an annual Roth IRA contribution. Someone who his 50 years old and saving $111,083 this year, can make a $5,000 IRA contribution and a retirement plan contribution. For the sake of this example, let us assume the 50-year-old has a SEP-IRA and can contribute $44,000. When retirement plan contributions are maximized for the year, the remaining $62,083 will have to be saved to taxable accounts.

It certainly can be a struggle to come up with Roth IRA contributions when you are young, but the end result should be very rewarding. Young investors saving small amounts of money each year can take advantage of compounding over a long period of time. The Henssler Financial Group recommends considering the full weight of your spending habits and purchases, and to strike a balance between saving and enjoying your money.

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