This post was inspired by a recent conversation I had with a
former student. As is customary in my classes, I encourage students to contact
me if they have questions while in the “real world” after graduation.
The student was contemplating contributing the maximum to a
Roth IRA for 2018 – which is $5,500, and then potentially doing the same for
2019 – which would be $6,000.
His concern was market volatility. He was afraid of
contributing to the IRA, then seeing is lump sums of $5,500 and $6,000 respectively
plummeting if the market were to drop substantially.
I told him to look at it from this perspective. The middle
letter in the acronym IRA stands for retirement. This young man is 22 years old,
planning to retire in 30 to 40 years.
I told him that he could consider contributing the maximum
to his Roth IRA every year, regardless of what he thoughts the market might do.
In other words, if his retirement is 30 to 40 years away, why be concerned with
what the market is going to do in 1, 2, or even 5 years.
To help ease his worries about the market volatility and
subjecting the entire annual, lump sum IRA contribution to volatility all at
once, I told him he could simply dollar cost average $500 monthly for his 2019
contribution. This seemed to put him at ease.
And that’s my advice to readers, particularly young readers,
but even those with a long-time horizon for retirement. Focus on the future,
stick to your savings plan, and let your investments and compound interest work