April is the cruelest month, keeping me inside doing taxes while I stare jealously at my friends’ Strava feeds detailing their adventures and the miles they’ve ridden. April is also the month that many inflict cruelty upon their future selves by funding their IRAs a full fifteen and a half months later than they could have.
Exhibit one, a text from someone I advise:
This is typical. Many fund their IRAs at the last minute. You don’t give it a lot of thought until it’s almost (or in the case above) too late. So, being curious about what might be lost by funding at the last minute, I decided to figure it out.
I ran an analysis from 1987 through to May 6, 2019.* I made a few assumptions such as:
- Twenty five as the starting age. I thought a twenty five year old would be somewhat established and able to fund an IRA at the earliest possible date. Optimistic, that’s me.
- Full funding at the maximum allowed each year, including catch up contributions after turning 50.
- Investing on either the first business day of the year or on tax day, the last allowable date for IRAs of the prior calendar year. And no, I did not account for Patriot’s Day, so apologies to all you minutemen.
- A portfolio consisting solely of the US equity market, proxied by an index fund.
The results tell a simple yet powerful tale.
- Investing earlier trumps procrastinating. Procrastination would have cost $69,500. With twelve years until she has to start taking her Required Minimum Distributions, our now 58 year old could forgo more than double that difference in the decade to come if stock market gains continue apace. Another $140,000 could make a real difference to her 7-12 years from today.
- Returns from investing at different start times turned out to be similar, 9.72% versus 9.62%. The big difference comes almost entirely from investing earlier.
- Contribution limits, at $6000 today versus $2000 from 1987-2001, make the stakes even higher for today’s 25 year olds. Investing more earlier could make a bigger difference to your future self. Keep in mind that the likelihood of a traditional pension is small.
- Investing early, if feasible, is more important now than ever. Returns may not reach the 9.7% that accrued over the last 33 years in the years to come. We have been in a bull market for over 10 years. Nothing lasts forever.
If you are wondering whether it ever does make sense to delay your contribution, the answer is yes. Contributions made on the next year’s tax day for 2000-2002 and 2007-2008 have returned more than investing in January of those years would have. The problem is identifying such years in advance. Both sets of years represent protracted bear markets.
There have been many other severe market declines in the last 33 years. Just last year we saw a decline of 20%. Still, if you had funded your IRA on the first business day of 2018, you would be up 11% as of 5/6/2019. Investing early in 1987, 1990, 1998, 2011 and 2016 would have paid off too. All those years saw big selloffs. Six of them (and I probably missed some) to five in which it would have paid to delay. Good luck identifying the latter.