Why should you save for retirement?
With uncertainty over the future of Social Security and life expectancies increasing, many people will find they need to supplement their pensions with additional savings. So depending on the amount of your retirement accumulations, your personal savings may play an increasingly important role in how well you live in retirement. In fact, you may need anywhere between 70% to 85% or more of your pre-retirement income just to maintain your current lifestyle in retirement.
How an IRA can help
When you invest in an IRA, your contributions and earnings compound over time while growing tax deferred (in the case of a Roth IRA, your withdrawals may be completely federal tax free, provided they meet certain criteria). Since tax-deferred savings can help your money compound at an even faster rate than money in non-tax-advantaged investment vehicles, an IRA can be a good choice for helping you build additional funds for retirement.
The power of compounded savings
While it's generally a good idea to maximize your IRA contributions if you can, setting aside even a modest amount from each paycheck can make a significant difference over time. By contributing now, you can benefit from the power of tax-deferred compounding for a longer period of time. (Note that for the 2009 tax year, the maximum Traditional IRA or Roth IRA contribution is $5,000, or $6,000 if you're age 50 or older.)
This chart shows how three people — all under age 50 — end up with substantially different IRA accumulations, based on the amount of money they invest each year. Gary invests $2,000 per year in his IRA. Bill makes a $3,000 contribution per year. And Diane makes the maximum contribution every year, which for her is $5,000 for the current tax year. As this chart shows, investing the maximum amount like Diane can add thousands of dollars to an IRA over a 30-year period.
Get started with a TIAA-CREF IRA
1 This chart assumes a hypothetical interest rate of 6% with no withdrawals during the period indicated. This calculation does not reflect the deduction of any fees or expenses and is not intended to predict or project an investment rate. If expenses were included, the performance would be lower. Actual returns will vary.
2 For those under age 50, the maximum contribution limit is $5,000 for both the 2008 and 2009 tax years. For future years, the contribution limits will be subject to cost-of-living adjustments based on prevailing inflation rates. The figures shown on this chart are based on an assumed hypothetical inflation rate of 3%. The chart also assumes that the maximum annual IRA contribution is $5,000 for 2008 to 2010; $5,500 for 2011 to 2013; $6,000 for 2014 to 2016; $6,500 for 2017 to 2018; $7,000 for 2019 and 2020; $7,500 for 2021 to 2023; and $8,000 for 2024 and all subsequent years. These maximum contributions are based on current tax laws and are subject to change.
The tax information contained herein is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
© 2009 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017
