You're Never Too Young to Start

Question of the week:I'm 22, one year out of college and working full time. My parents have been bugging me to open an IRA, but I just don't see that saving for retirement should be a priority at my age. What do you think? --Danny in St. Joe

Dear Danny,

While it's true that you have plenty of time before retirement, it's also true that time is your single best ally in building a healthy retirement fund. The more time compounding has to work, the better off you'll be, and waiting just a few years will make a huge difference.

When we recently asked members of the Armchair Millionaire community whether they are funding their IRAs this years, we heard from several in situations very similar to your own who are enthusiastically saving for retirement:

"My husband and I contributed the max to Roth IRAs in 2002 and already have the max set aside for our 2003 Roth IRA. We are in our early 20s and have added to our accounts ever since we got part time jobs in college." --Alpy

"My wife and I just started investing in IRAs this year. We're both 23 so we wanted to get a head start and be in good shape for retirement." --Ryan

And we heard one note of regret at not beginning years ago:

"My spouse and I fully fund our Roth IRAs each year. We are both in our mid 30s and have been doing this for three years, but we wish we had started much sooner." --DSW

These folks all understand the real benefit of starting young to save for retirement. It helps to look at it in terms of real dollars. Assuming that you'd like to retire at 62, you have 40 years to work with. Let's say that you were to follow Mom and Dad's advice and start putting $3,000 a year into your IRA now, and continue doing so for each of those 40 years. Assuming an average annual return of 10 percent (about the historical norm), you'd have $1,460,555 by the time you hit retirement.

Let's assume, on the other hand, that you put off saving for retirement for the next 10 years, and started when you were 32. Again figuring a $3,000 annual contribution and a 10 percent annual return, you'd have only $542,830 at retirement! By missing those early years, compounding would lose much of its power, and you'd end up with almost a million dollars less.

Convinced now of the wisdom of starting young? If so, my guide will show you how to start funding your IRA.

The Armchair Millionaire Guide to IRAs

• The two types. The traditional IRA and the Roth IRA will both help you reduce your taxes, but with one main difference. The traditional IRA bestows that tax break now, in the form of a deduction, while the Roth gives you a break later, when your withdrawals during retirement will be tax-free. If you're unsure about which is better for your situation, I recommend that you consult with a tax advisor.

• Contribution limits. I'm often asked, "How much should I should I put in my IRA?" My answer is nearly always the same: "As much as possible! Have you ever met a retiree who believes they saved too much for retirement?" You can contribute $3,000 to your IRA this year, which is the same as 2002. If you have more than one IRA, your contributions to all of them can total no more than $3,000.

• Income limits. Both the traditional and Roth IRA have income limits that determine whether you can contribute and, in the case of the traditional, how much of a deduction you can receive. The Roth has much higher limits and most people qualify to contribute to one. The IRS spells out the limits on its Web site as www.irs.gov.

• Opening your account. Nearly every mutual fund company and brokerage offers IRAs, as do many banks. Simply contact one to request an IRA account application.

THE BOTTOM LINE: Put time on your side--start saving for retirement today. And if you even want to play a little catch up, you still have until April 15 to fund your 2002 IRA.

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