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Procrastination in Investing
Many people who contribute to an Individual Retirement Account (IRA) wait until the end of the year or even later to deposit their funds into the IRA. Some people will wait until April 15 to make a $2,000 contribution for the previous calendar year. They do this because they are seeking the tax deduction for the traditional IRA. And, in April, they will do almost anything to reduce the taxes owing for last year. Even with the new Roth IRA (which became available in 1998), some people may wait until the last moment because they don't have the money, or they just have a hard time parting with their money (for a long time), or they just don't get around to it. Well, I wondered what this procrastination would cost in terms of lost earnings.
As soon as you contribute to the IRA, the interest earnings accumulate tax-deferred in a traditional IRA until you withdraw the funds, and tax-free in a Roth IRA. If you wait until the end of the year, or up until April 15 of the following year, to make the contribution, those funds are not earning interest, or at least, not earning tax-deferred or tax-free interest. Thus, there are some lost earnings.
How much is lost? Let us say that you contribute $2,000 per year for 10 years to an IRA. And let us assume that the investment earns 8% per year. If you make the contribution at the beginning of the year, say on January 2, then, after 10 full years your investments and earnings will amount to $31,291. But, if you procrastinate, and wait until the end of the year, say December 31 to deposit the $2,000 into your IRA, your investments and earnings will amount to $28,973. Thus, you will have foregone interest earnings of $2,318. This is the price of procrastination!
And of course, after 10 years of habitual procrastination, it is unlikely that this pattern of financial behavior will change, and the loss will continue to increase. After 20 full years, the early bird investor would have accumulated $98,846; but the procrastinator has only $91,524. In each case, the investor contributed $2,000 per year for 20 years, but because of waiting until the end of the year, the procrastinator has lost $7,322 in interest earnings.
A final note: If the funds used to make the IRA contribution at the end of the year were held in some other interest-bearing or dividend-earning account during the year, then the amount of the loss would be much less. If the interest rate or dividend rate were the same for both the non-IRA and the IRA, then the amount of the loss would be the taxes paid on the taxable earnings each year. Nevertheless, the point of this analysis is that it pays to save. And the earlier the better.
Copyright © 1999 Ira M. Freed |
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