(Photo: Jeff with a well-earned martini.)
After 40 years in the workforce, my largest pool of investment money is in my Individual Retirement Account (IRA). This is true for many of us that make a living by working for someone else.
Here are the reasons why:
- 100 percent of the money saved to the account (income taxes aren’t taken out of contributions) gets invested and put to work. Granted, this money will be taxed, but the money I saved in my 20s won’t get taxed until withdrawals start when I’m retired or when I’m required to take money out at age 70 ½.
- Since I entered the investment business shortly after college, I got comfortable with the idea of just leaving it invested in stocks. (That’s not going to be the case for everyone, depending on risk tolerance, stage of life, and other specific individual and/or financial circumstances.) Yes, it did fluctuate … a lot! But I left it invested through some scary market events and enjoyed the rise during bull runs. I have no clear way to calculate the true return, but it’s probably been a “market-like” return, so I would guess something either side of 10 percent on average since the early 1980s. Please note that this return isn’t indicative of future performance.
- The growth, the dividends, the interest, and all the returns compound without taxation until they’re withdrawn, and I haven’t retired, so the money that is growing has never been taxed! Woo-hoo!
- There was a 10 percent penalty if I withdrew funds before age 59 ½, plus it would be taxable as income, so I never spent any of the money. I left it invested, though I was less than frugal with some of the nonretirement account money I accumulated.
- I always maximized my contributions, and, as I progressed in my career, I was able to take advantage of larger and larger contribution opportunities.
Though I did divide the money in the account due to divorce, and some ugly markets cut the value significantly (i.e., 1987, 2008, etc.), it is a substantial amount that will be valuable after (if) I quit working. Any residual amount (the money left after I kick off) can be withdrawn over time by my beneficiaries, based on their life expectancy, producing life income for them.
In my book, The Five Financial Foundations, maximizing tax-advantaged contributions is foundation number three. For the price of a couple of expensive coffee drinks, you can learn more about my time-tested views on how to save and invest for your future.