(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Mark Miller
CHICAGO, July 24 Individual Retirement Account
contributions are getting larger - an encouraging sign of a
recovering economy and improved habits among retirement savers.
But there is an "I" in IRA for a reason: investors are in
charge of managing their accounts. And recent research by
Vanguard finds that many of us are leaving returns on the table
due to an all-too-human fault: procrastination in the timing of
IRA savers can make contributions anytime from Jan. 1 of a
tax year up until the tax-filing deadline the following April.
But Vanguard's analysis found that more than double the amount
of contributions is made at the deadline than at the first
opportunity - and that last-minute contributions dwarf the
amounts contributed throughout the year. Fidelity Investments
reports similar data - for the 2013 tax year, 70 percent of
total IRA contributions came in during tax season.
Some IRA investors no doubt wait until the tax deadline in
order to determine the most tax-efficient level of contribution;
others may have cash-flow reasons, says Colleen Jaconetti, a
senior investment analyst in the Vanguard Investment Strategy
Group. "Some people don't have the cash available during the
year to make contributions, or they wait until they get their
year-end bonus to fund their accounts."
Nonetheless, procrastination has its costs. Vanguard
calculates that investors who wait until the last minute lose
out on a full year's worth of tax-advantaged compounded growth -
and that gets expensive over a lifetime of saving. Assuming an
investor contributes the maximum $5,500 annually for 30 years
($6,500 for those over age 50), and earns 4 percent after
inflation, procrastinators will wind up with account balances
$15,500 lower than someone who contributes as early as possible
in a tax year.
But for many last-minute savers, even more money is left on
the table. Among savers who made last-minute contributions for
the 2013 tax year just ahead of the tax-filing deadline, 21
percent of the contributions went into money market funds,
likely because they were not prepared to make investing
decisions. When Vanguard looked at those hasty money market
contributions for the 2012 tax year, two-thirds of those funds
were still sitting in money market funds four months later.
"They're doing a great thing by contributing, and some
people do go back to get those dollars invested," Jaconetti
says. "But with money market funds yielding little to nothing,
these temporary decisions are turning into ill-advised
longer-term investment choices."
The Vanguard research comes against a backdrop of general
improvement in IRA contributions. Fidelity reported on Wednesday
that average contributions for tax year 2013 reached $4,150, a
5.7 percent increase from tax year 2012 and an all-time high.
The average balance at Fidelity was up nearly 10 percent
year-over-year to $89,100, a gain that was fueled mainly by
strong market returns.
Fidelity says older IRA savers racked up the largest
percentage increases in savings last year: investors aged 50 to
59 increased their contributions by 9.8 percent, for example -
numbers that likely reflect savers trying to catch up on nest
egg contributions as retirement approaches. But young savers
showed strong increases in savings rates, too: 7.7 percent for
savers aged 30-39, and 7.3 percent for those aged 40-49.
Users of Roth IRAs made larger contributions than owners of
traditional IRAs, Fidelity found. Average Roth contributions
were higher than for traditional IRAs across most age groups,
with the exception of those made by investors older than 60.
But IRA investors of all stripes apparently could stand a
bit of tuning up on their contribution habits. Jaconetti
suggests that some of the automation that increasingly drives
401(k) plans also can help IRA investors. She suggests that IRA
savers set up regular automatic monthly contributions, and
establish a default investment that gets at least some level of
equity exposure from the start, such as a balanced fund or
target date fund.
"It's understandable that people are deadline-oriented,"
Jaconetti says. "But with these behaviors, they could be leaving
returns on the table."
(For more from Mark Miller, see link.reuters.com/qyk97s
(Follow us @ReutersMoney or here.
Editing by Matthew Lewis)