IRA Insights
Now is the time to graduate to an IRA
IRA insights
Looking for the perfect graduation gift?
Consider a Roth IRA.
Vanguard contribution data show that only 8%
of IRA contributors for U.S. tax-year 2013 were
under age 25.
Helping your graduate fund an IRA can ensure he
or she doesn’t miss out on “prime saving years.”
Almost any graduate with earned income can
make an IRA contribution.
Vanguard research | May 2014
IRA investors can be slow getting to the starting line
25%
Percentage of 2013 tax-year
Vanguard IRA ® contributors
23%
23%
21%
20%
20
15
10
8%
5%
5
0
25 or under
26–35
36–45
46–55
56–65
Over 65
Investor’s age
Source: Vanguard.
Compounding is a term describing the snowball
effect that happens when you generate more
earnings on top of earnings.
Because of compounding, every dollar contributed
at age 20 can earn more than twice as much as
a dollar contributed at age 35, and more than ten
times as much as one contributed at age 55.
Sometimes, a penny saved is five pennies earned
Value of a $1 contribution at age 65
Providing for a secure retirement is easier
if graduates leverage an asset they have in
abundance: time.
$6
5
4
3
$4.84
$3.80
2
$2.95
$2.24
$1.67
$1.19
$0.80
$0.48
45
50
55
1
0
20
25
30
35
40
Age when the $1 is contributed
Earnings
$1 contribution
Notes: This hypothetical illustration assumes 4% annual return, after inflation; amounts in today’s (2014) dollars.
Source: Vanguard.
Getting in a savings habit right away can
provide a head start that lasts a lifetime.
Consider two hypothetical investors. Investor
A contributes $450 per month in a balancedfund Roth IRA for ten years starting at age 21,
and then stops. Investor B makes the same
$450 monthly investment, but doesn’t begin
until age 40, then continues for 25 years.
On average, at age 65, Investor A will have
accumulated more money for retirement,
despite contributing only 40% as much.
A fast start is key to winning the retirement marathon
Investor A
$54,000
Investor B
$135,000
$97,129
Average projected account value at age 65
Amount contributed
Projected earnings
Notes: This hypothetical illustration assumes 4% annual return, after inflation; amounts in today’s (2014) dollars. Investor
A contributes $450 per month from ages 21 through 30; Investor B contributes $450 per month from ages 40 through 64.
Source: Vanguard.
Connect with Vanguard >
vanguard.com
$204,447
Connect with Vanguard® > vanguard.com
Vanguard research authors
Stephen M. Weber, CFP ®
Maria A. Bruno, CFP ®
The authors acknowledge John Rykaczewski in Vanguard’s Client Insight Group
for providing the IRA contribution data used in this analysis.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard funds, visit vanguard.com or call 800-662-2739
to obtain a prospectus. Investment objectives, risks, charges, expenses, and other
important information about a fund are contained in the prospectus; read and consider
it carefully before investing.
Vanguard Research
P.O. Box 2600
Valley Forge, PA 19482-2600
© 2014 The Vanguard Group, Inc.
All rights reserved. Vanguard
Marketing Corporation, Distributor.
ISGIRA5 052014