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Does an IRA make sense

Chris Farrell Sep 11, 2010

Question: Hi, I read your answer about saving for retirement for foreigners. I do get a W2 but I am not eligible for a 401 or 403b plan. I have some savings, so I was thinking of opening an IRA, however I got told by people at Vanguard and Fidelity that you can’t contribute once you don’t have a source of income in the US (let’s say I go back to Europe and I want to keep contributing). Thus I wonder if it is worth it opening an IRA for just a few years and then let it sit until I get to be 60 before I can access the money. Sorry for the long question. All the best. Nicola, Lafayette, IN

Answer: Fidelity and Vanguard are right. I would still open up the IRA. One reason is the compounding effect of time.

For example, let’s say you put $1,000 a year into an IRA from age 20 to age 30, and then you stop (bad idea, but for this example we’ll make that assumption). Your money earns a 7% annual rate of return. (Okay, I’m being optimistic!) When you retire at age 65, you’ll have $168,514 in the account.

In sharp contrast, a colleague of yours starts saving at age 30, but puts $1,000 a year into an IRA for the next 35 years until age 65. He’s contributed more than three times what you did. How much does he have in his account, assuming a 7% rate of return? His IRA is only worth $147,913, or $20,601 less than yours.

You can cut the numbers all kinds of ways, but the bottom line message is the same: You should take advantage of time.

The other reason for opening the IRA is the uncertainty of when you’ll actually head back overseas. It’s easy for a 2 to 3 year time horizon to slip to 4 or 5 years. You still end up in Europe but it takes you longer than you thought. Meanwhile, you’ll be funding the account. Of course, you could end up in Europe earlier than expected. But you’ll still have some retirement money working for you.

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