Why IRAs are a Good Idea
Retirement
How soon? How secure? How comfortable? If you want to calculate how much you'll need to save, or don't know a Roth from a Rollover, we have lots of helpful information for you.
"Tax-sheltered income plus compounded return "-it's enough to put a goofy smile on any financial planner's face. And that's what an IRA (Individual Retirement Account) gives you. At ShareBuilder, we felt that a great idea was failing to live up to its potential, so we decided to face the problem squarely by reinventing the IRA for investors.
Once upon a time, you didn't really have to think about this stuff. Retirement meant doing forty years at Global Widget, accepting a gold watch at 65, and then living off an index-linked check for the rest of your life. Fewer and fewer of us can look forward to the luxury of that simple bargain. Instead, we're doing our own planning and saving. Maybe with matching employer contributions to a 401(k), maybe not. In any case, for more and more of us, a comfortable retirement depends on investment decisions we make now. More of us would like, if we could, to take advantage of a convenient vehicle like the IRA.
But for many people the IRA is a desirable option with a big catch. The desirable part is putting away money for retirement ($4,000 for 2007 and $5,000 for 2008), lowering your tax bill (if you qualify), and enjoying tax-deferred earnings. The catch is that most of us just don't have the entire yearly contribution in one lump sum available to invest by April 15th.
Suppose the year is 1928, at the height of the Twenties boom, and Grandpa is considering how to save a spare $1,000 for his future great grandchild (that's you). If he deposited it into a regular savings account at 4% interest, it's now worth somewhere around $20,400 - but that's barely keeping pace with inflation. On the other hand, if he had put the same $1,000 into stocks mirroring the performance of the S&P 500 Index, it would now be worth approximately $1.66 million*.
Of course, to get from A to B Grandpa needed to weather the entire Great Depression, and several other major "corrections", without needing to liquidate his investment to pay for the groceries. And he also needed to do it without panicking - without losing faith in his long-term strategy. Easier said than done because Grandpa could not have predicted his investment results. We also cannot rely on past performance as a guarantee of future returns.
At ShareBuilder, instead of funding your IRA in one lump sum (usually near the end of the tax year), you simply set up an automatic, recurring monthly investment plan. And, as in a 401(k) plan, your money goes straight into the stocks or index shares of your choice. The ShareBuilder IRA is for anyone who wants to make retirement planning a part of their monthly family budget.
The option of monthly IRA investing marks a fundamental change in how accessible and usable IRAs are. And the same easy system applies here at ShareBuilder whether you choose to open a "Traditional" or a "Roth" IRA.
Learn more about which type of IRA is right for you.
IRAs have potential to build wealth over the long-term. Of course, how much your IRA is worth in the year 2025 (or 2045) depends on how well you pick investments now. There's no guarantee about what returns the stock market will provide tomorrow, let alone the next decade. Nor is there any crystal ball that will tell you how much (or how little) of that return will be nibbled away by that hungry ogre called inflation. Still, the stock market is famous for being both volatile in the short run and rewarding in the long run.
Some other practicalities to think about. Whether Traditional IRA contributions are tax-deductible may depend on several factors, including whether you or your spouse have a qualified retirement plan at work, or whether your AGI (Adjusted Gross Income: see your IRS Form 1040, line 33) is low enough.
Assuming you fit the bill, you can start your retirement planning now by making the first convenient monthly payment. And if you choose a Roth rather than Traditional IRA, your account earnings may be tax-free instead of merely tax-deferred. Now there's a thought to make Grandpa smile!
*Hypothetical presentation only. Past performance is not a guarantee of future return. Experience will vary with investment selection and changing market conditions.