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Teacherman1 (< 20)

IRA's The Friend of the Young



December 12, 2009 – Comments (12)

Unfortunately, many people reach the point in their lives when they are ready to retire, and find that the "Golden Years", they were expecting, are at best, "Copper Years".

They thought that by buying a house, having a "retirement plan" through their employeer, and of course Social Security, they would be able to live a comfortable life in their "Older Age".

While I didn't always follow her advice, my grandmother offered some that was very good. The one thing she emphasized above all, was to always save some for a rainy day.

So, in the hope that those who are still young might start thinking about this while they have the time left to take advantage of the "magic of compounding", I am going to show just how magical this compounding thing can be.

I am going to post some different examples of what you could expect to have at retirement, if you invest various amounts, earning various rates of interest, over a realistic working life of 45 years: starting at the age of 20.

These figures are based on using a Traditional IRA as the vehicle of investment. There are advantages and disadvantages to using a Traditional IRA as opposed to a Roth IRA, and of course, if you start later, or retire later, the numbers will change, but no matter what you use, or at what age you start, you are likely to have more at retirement than you otherwise would, and probably more than you would expect.

Starting age 20, retirement age 65.

$2,000 per year

3% = $191,000

4% = $251,741

5% = $335,370

6% = $451,016


$3,000 per year

3% = $286,504

4% = $377,612

5% = $503,055

6% = $676,524


$4,000 per year

3% = $382,006

4% = $503,482

5% = $670,741

6% = $902,032


$5,000 per year (The current maximum)

3% = $477,507

4% = $629,353

5% = $838,426

6% = $1,127.541

These contribution amounts are only about $160.00 to $400.00 a month, or $40.00 to $100.00 a week. The calculations are based on an annual contribution, so if you contribute more often, they will be even greater.

Think about what you spend your money on, and what you would have to give up. In most cases, not much.

Another piece of advice from my grandmother was "Always pay yourself first", and if you live within your means, there won't be many others you have to pay second.

Hope this generates enough interest that you will check out the numbers for your own age and contribution levels, it might be an "eye opener".

IMO, these interest rates are not particularly high, and are easily obtainable. I'm old enough to remember when 5% was pretty much a standard rate on a passbook savings.

Good luck with your investments, and plan for your retirement so that they may truly be "Golden Years". 



12 Comments – Post Your Own

#1) On December 12, 2009 at 1:24 PM, Option1307 (30.59) wrote:

Great post! I think all to often we forget the power of compounding interest and starting early. I hope more people will think of this. It's never too early to start thinking about your future/retirement.

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#2) On December 12, 2009 at 2:53 PM, rofgile (99.47) wrote:

Its also noteworthy that making a risky investment can serious jeopardize your savings of all those years.

A 100% gain in stock is equivalent to just a 50% loss in the same stock.  (Ie, it is easy to wipe out your gains!).

Right now bank savings rates are near 1%, with treasury bonds also low, and many fearing depreciation of the US currency/inflation.

While it is definitely great to contribute to an IRA yearly to take advantage of the tax free savings rates and compound your money through good investments - it is very risky for saving money right now.

I am highly invested in stocks (and strongly feel the high risk of this, but am quite young).  I am researching bonds, but due to the low interest rates, it seems that it is a poor time to begin investing in bonds and waiting till the rates rise a little bit may be a better time.  Still, it annoys me that interest rates have gotten as low as they are.


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#3) On December 12, 2009 at 5:08 PM, SockMarket (34.39) wrote:

so a question to pose to you two: Suppose you are one of these young people (as I am) what % of your portfolio would you put in relativly risky investments and how much would you put in safe, dividend stocks (like pipelines, propane co's, and the occasional ultility)?


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#4) On December 12, 2009 at 6:42 PM, Option1307 (30.59) wrote:

That's a tough question to answer as it really depends on many personal factors. Being a young person myself (mid 20's), I am fully aware of the advantages to starting young and having a long time frame for my investments to mature.

It depends on what you consider to be risky investments as well, your definition may not be the same, as say my own, or someone elses.

I have my real life investments broken down into two accounts. My Roth IRA is purely long term investments and has little/no "risky" investments. I plan on holding many of these stocks for a long long time. Solid dividend paying companies, big name stocks that should continue to do well, and a few mutual funds. I'm talking things like MO, XOM, CGMFX, BWP, KO, X, etc.

This account is definitely the larger of the two and I don't play with it often.

The second account is my trading/risky account. Some of these picks are sure things IMO (WNR, VLO, etc.), great valuations (LXP, etc.), or gold/silver (CEP, SLW, etc.). I also do a decent amount of trading here as well.

For me, it helps to keep the two accounts separate. It ensures I never get too crazy.

It's hard for me to put a percentage on what I have in risky investments b/c of what I mentioned above. However, I'd say that you should first work on establishing a solid portfolio first, then worry about risky picks. And only allocate capital that you could live without, afterall they are risky picks. If I had to throw a number out there, I'd say about 30% for me personally. But, seriously that could b way hgher/lower depending on what one considers risky...

Sorry I can't be anymore specifica than that.

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#5) On December 12, 2009 at 9:51 PM, ChrisGraley (28.61) wrote:

The old theroy was to invest your age as a percentage of of relatively safe investments other than stocks and put the rest in stocks. I'm not sure I buy into that theorey. If you are a value investor, I don't see any problem with being 100% in stocks until age 50 and even after that if you've been consistently successful between the ages of 20 and 50. There really isn't a definition of risk that I can give anyone though, because you have to have your own risk tolerance. If you just can't stand seeing an investment lose money even though you are certain of your research, you might not want to be in stocks at all.

The important thing is starting early though and living within your means. If you can do these 2 things your odds of being successful go up imensely!

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#6) On December 13, 2009 at 11:55 AM, Teacherman1 (< 20) wrote:

I was going to put this on the "Foolanthropy" blog, so that the kids at the Thurgood Marshall Academy could see it, but thought it was too long.

Not sure how to insert it as a link within a post.

I tend to agree with Chris. Being in stocks in your younger years is fine and it helps to raise your interest yield, but as you get closer to retirement, you might switch over to non equity investments. It is likely they will be paying a higher rate than these unusually low ones we have been experiencing lately.

All too many retired, and near retired have learned the hard way in the past couple of years, that a "crash" can kill your dreams in a hurry.

Thanks for the comments.

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#7) On December 13, 2009 at 12:05 PM, Option1307 (30.59) wrote:


Not sure how to insert it as a link within a post.

This is simple, hope this helps:

1) Copy (ctrl +c) the URL for this page:

2) Go to the page you want add the link to

3) In the "Add a new comment" box, type whatever you want. To add a link, simply highlight a few words.

4) With a few words highlighted, click the link button on the top of the "add a new comment box" (it looks like a chain symbol). At few words MUST be highlighted for this to work.

5) A new window will pop up, simply paste the URL into this window (ctrl + v). And then press the insert button on that same window.

6) The window will disappear and your highlighted words should turn blue and be underlined.

7) Press the "preview your comment" button

8) Press "post your comment" button.


It's as easy as that, let me know if you are still having problems. I think its a great idea to post this on TMA page.

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#8) On December 13, 2009 at 4:02 PM, Teacherman1 (< 20) wrote:

Thanks Option, but it will not work for me for some reason.

I am also currently unable to add any picks to my Watch List.

Don't know if there is suddenly a problem with my browser, or if it is something else. I sent a help message to the Fools, so maybe they can fix it. 

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#9) On December 13, 2009 at 4:17 PM, Teacherman1 (< 20) wrote:

It was my browser. I usually use FireFox, but something isn't working right on it. I came back using Explorer and it worked.

Both for my Watch List and to post the link.

Again, thanks for teaching an old dog a new trick.

Back in the days when I  was using a WEBTV to access the internet, I had to write my own HTML code to do anything on the web. Have gotten spoiled since I switched over to a real computer.

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#10) On December 13, 2009 at 5:42 PM, Option1307 (30.59) wrote:

Back in the days when I  was using a WEBTV to access the internet

hahaha, I barely even know what that is! Glad I could help and you got it figured out. Enjoy the rest of your weekend. 

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