Boost Your IRA Savings by More Than $100,000 With Two Simple Ideas

Last Updated Jun 24, 2011 12:58 PM EDT

Recent statistics from Fidelity Investments show that Americans are making progress on saving for retirement. Contributions to IRAs in 2010 averaged $3,450, almost 9 percent higher than 2009 and almost 16 percent higher than 2008.

There's also good news coming from younger investors: The number of contributors under age 30 jumped 16 percent for traditional IRAs and nearly 9 percent for Roth IRAs. The number of contributors under age 25 for either type of IRA jumped 24 percent. Looks like the Lisa Simpsons of the world are doing better than the Homers!

Another interesting statistic: Historically, Fidelity has received about 45 percent of all IRA contributions in the 28 days prior to the April tax deadline.

This leads me to the two simple steps you can take to increase the amount you'll accumulate for retirement:

  1. Contribute the maximum allowed. This is $5,000 per year if you're under age 50, and $6,000 per year if you're at least age 50.
  2. Contribute as soon as possible, rather than wait until the tax return deadline. You can contribute as early as January 1st of a year; contributing early gives you a little more than 15 months of additional investment earnings, compared to waiting until April 15th of the following year.
Let's look at one example of how much extra your savings can accumulate if you adopt these two tips. First, let's suppose you invest for 25 years and your investments earn 6 percent per year. Under the first scenario -- using the results of the Fidelity study as our guide -- you contribute the average amount ($3,450) on the first of April following each tax year. Under the second scenario, you contribute the maximum amount ($5,000) on the first of January during the particular tax year. After 25 years, your accumulated savings under the second scenario will be $102,990 higher than the first scenario.

You can make this difference even higher by bumping up your contributions to $6,000 when you reach age 50.

If you're one of the people who usually wait until the last minute to make your IRA contributions, try doubling down just this once. Make your 2010 and your 2011 contribution now, and then keep on this schedule from now on.

Confused whether to contribute to a traditional or Roth IRA? Don't let that stop you from contributing -- using either type of IRA is much better than spending all the money now.

One more thought: While I'm glad to see contributions to IRAs increase, contributing $3,450 per year won't provide for a very comfortable retirement -- unless you don't mind living in a tent and eating noodles every day. That's yet another reason to adopt the above tips. You'll need every dollar you can find to make ends meet in retirement. As you can see by the above example, small steps taken every year can really make a difference!

Image from iStockphoto contributor RBFried
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.