Timing IRA Contributions

This week’s blog is similar to one we ran as part of our Q&A series a few years ago. We often have clients who question our reasoning for making IRA contributions as early as possible, so I would just like to reiterate our stance.


In the past, many of you have received some form of communication from Rollins Financial suggesting you should make an IRA contribution early in the year. Many undoubtedly wonder, “What’s the rush?” Although you actually have until the tax filing deadline of the following year to make your IRA contribution, we find it to be in your best financial interest to make the contribution on the first business day of the year (which for 2014 is January 2nd).

As many of you know, stocks do not rise in value in a straight line. However, during 2012 and 2013 there was not a single day during either year that the S&P was negative in YTD performance. This means the best time to have invested was, in fact, day one! Granted this is an unusual situation, and if we actually knew ahead of time the best day out of the 15½ month window to make your IRA contribution, we would obviously suggest you make it on the day when investments are the cheapest. Unfortunately, no one can predict when that day will be. And if they could, they surely would not be reading this blog (or writing it for that matter).

That being said, let’s focus on the likeliest scenario. Stocks have produced positive annual returns in approximately 72% of the calendar year time periods since 1926. The probabilities suggest that there is value in contributing as early as possible. And here’s why….

As an example, let’s make the following assumptions:

• Our Expected Return is 8% annually (some years will be higher and some lower, but we’ll expect this average over the next 35 years)
• Each Participant will make an annual lump sum contribution of $5,500 to their respective IRA
• Each person will retire at 65 (we’ll use this as the year end age)
• This is their only means of savings

If we make the noted assumptions, you can see the results in the following table:


After reviewing the table, you’ll notice the savers, who choose to invest their IRA contributions at the beginning of the year and are exposed to the 8% return for the entire year, will realize higher returns. The 30 year old who contributes and invests for 35 years realizes total returns of over $75,000 more by making his/her contributions early in order to gain the full benefit of each year’s returns. The 40 year old is better off by nearly $32,000, and finally the 50 year old who has only invested for 15 years has nearly $12,000 more than if he/she had waited and contributed at the end of the year.

I also performed the same test for those of you who can contribute to a SEP-IRA. Since SEP-IRA contribution limits are much higher, the potential benefits are also greater when making early contributions. Let’s start with the assumption that a 40 year old with 25 years until retirement can contribute $30,000/year annually to a SEP-IRA. This hypothetical investor could end up with an IRA balance at retirement containing an additional $175,000 in value by making his/her SEP contributions at the beginning of the year vs. waiting until the tax filing deadline to make the contribution.

What’s the moral of the story here? Be proactive! Make the most of your annual IRA contributions; don’t wait until the end of the year or until the filing deadline in April to make your contribution.

Thank you again for visiting RollinsFinancial.com and we hope you have found this information useful. Please feel free to email us and provide us with your thoughts and comments.

Best regards,
Eddie Wilcox, CFA, CFP®

Happy Holidays from Our Family to Yours!

Wishing you the joy of family, the gift of friends, and the best of everything in 2014!

"He was chubby and plump, a right jolly old elf,
And I laughed when I saw him, in spite of myself!
A wink of his eye and a twist of his head,
Soon gave me to know I had nothing to dread." Clement C. Moore
(Ava, on the other hand, was terrified!)

In celebration of the Christmas holiday, our office will be closed on Tuesday, December 24th and Wednesday, December 25th. Our regular office hours will resume on Thursday, December 26th.
AND, in celebration of the New Year holiday, our office will be closed on Tuesday, December 31st and Wednesday, January 1st. Our regular office hours will resume on Thursday, January 2nd.

If you have a matter that requires immediate attention when our office is closed, please contact me at jrollins@rollinsfinancial.com. You can also contact Eddie Wilcox at ewilcox@rollinsfinancial.com or Robby Schultz at rschultz@rollinsfinancial.com.

May your holiday season be filled with peace, joy and laughter!

Warm regards,
Joe Rollins

Let the Good Times Roll

From the Desk of Joe Rollins

November has come to a close, and it too proved to be another excellent investment month. 2013 is shaping up to be one of the best investment years in a decade. Aside from all of the constant negative talk about the market and its potential for loss, it has proven to be quite an extraordinary year.

For the month of November, gains were added on top of an already very profitable year. During the month of November, the Standard & Poor’s 500 had a total return of 3.1%, while the NASDAQ Composite and the Dow Jones Industrial Average had an excellent return of 3.7% for the month and the Russell 2000 Small-Cap index gained 4.1% for the month. Through the end of November 2013, the S&P 500 is up 29.1%, the NASDAQ Composite 36%, the Dow Jones 25.5%, and the Russell 2000 is up an astonishing 36.2%. In contrast to those impressive returns, the Barclay’s Aggregate Bond Fund has suffered a 1.7% loss for the year thus far.

November was consistent with the many positive months of 2013. Virtually all of the domestic stock funds were up from 2-4% for the month, while most of the international funds were either down or only marginally profitable. Bond funds, for the most part, were down for the entire month except for the high-yield bond funds which were marginally profitable during November. Like so many months before, the municipal bond funds continued to lose money during November and, for all practical purposes, every municipal bond fund is down for the year.

I am asked almost daily when I think the market will implode, or more specifically if I think that we are in a stock market bubble. If, in fact, we are in a bubble, it is one of the most unusual ones of all time. The market has gone practically straight up since 2009, yet stocks continue to be fairly reasonably priced. I find no extraordinary divergence between fair value and the current trading on the stock market.

One of the reasons why the market continues to be fairly priced is because interest rates are extraordinarily low. Every time I hear someone compare the current stock market to a period from a prior year, I always ask them to compare valuations with current interest rates. We receive a call almost daily from a prospective investor, trying to beat the yields on a money market account CD. If you have not figured it out by now, the reason there are such meager interest rates is because the Federal Reserve wants them to be that way.

It is fairly clear that the actions of the Federal Reserve are designed to inflate asset values. When you inflate asset values, you create a wealth effect wherein people feel comfortable spending their money on items such as new cars, homes, and other capital assets. One way to accomplish this is to make interest rates so unappealing that people begin to seek other ways to earn higher rates of return. For the last 18 months the Federal Reserve has consciously moved to keep interest rates low. They have succeeded in forcing cash out of people’s savings accounts and into other assets. This has also accomplished their goal of moving real estate to firmer ground while appreciating the real estate and equity markets, which is the exact end result that the Federal Reserve desires.

The perception by some that the stock market is too risky at the current time continues to baffle me. If you look over the last 20 years, there certainly have been periods of time when the market suffered losses, both big and small. In 1994, the market was marginally lower, losing less than 2%. And of course, we all remember the 2000-2002 losses that occurred after the NASDAQ Composite run-up in the dot.com rally. The stock market lost money in 2000, 2001, and 2002, and made a very dramatic move to the downside. Not long after that, in 2008, the market suffered one of its worst losses of all time, losing 37% in one year. Consequently over the past 20 years, the market lost money in five of those years, or 25% of the time. While that 37% loss in 2008 seems to be etched in everyone’s mind, they seem to forget that since then, the market, beginning with 2009, has increased yearly by the following percentages - 26, 15, 2, 16 and now 29%. Despite five years of losses in the past 20 years, the market still has an annualized return of 8.2%. If you consider that your money market account is currently earning zero and the market is returning 8.2%, it makes you question why anyone would keep money in cash these days.

Although virtually everyone reading this blog has cash available in money market accounts, they tend to only invest money annually or even less often and usually in large blocks. This limited investment strategy has proven to be unsuccessful. A significant amount of money could be made by investing monthly, which is referred to as Dollar-Cost Averaging. Made easy by electronic transfers from your individual checking account or money market account, your money could easily be put to work in a market that is earning handsome returns as opposed to earning virtually zero while sitting in cash.

While certainly nobody knows what the month of December holds from an investment standpoint, historically it has been a very good month. We have not had a negative December since 2007 and it is highly unlikely that we will see one in 2013. As previously mentioned, the period of time from November through April has historically been the most profitable time for investing in stocks because a lot of the money invested in pensions, IRAs, and other type of retirement accounts are invested during this period. If you have money that is not invested, now would be the time to take advantage of this excellent market. Additionally, we are quickly approaching January which would be a great time to make your IRA contributions for 2014.

Please feel free to give us a call to set up an appointment to discuss new ways that you can begin to save more and invest in enterprise by participating in the stock market.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins