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Don’t Be ‘Ridiculous’

29303480_sLast Saturday morning, I took my three girls, Maeve, Phoebe and Sophie, to have a “Daddy daughter” day. I try to do this once a month or so to get away from the hustle and bustle of daily life. It allows us to spend some uninterrupted time talking, which my girls love to do. So on our most recent outing, one of the things we talked about involved something Sophie had recently learned in school, Christopher Columbus and the debate over a flat versus round Earth. Sophie was amazed that at that time in history people had fears of literally falling off the edge of the Earth. Sophie couldn’t understand why people would think that. She asked, “Didn’t they realize how ridiculous that is?!”
 
After explaining to the girls that during the Middle Ages many folks lacked formal education, maps were not well plotted, and there was no satellite navigation and no GPS, I went a bit deeper. I told the girls that in life when you are uninformed, or (worse) misinformed, your actions can seem a little ridiculous in hindsight. People inherently fear what they do not know and also naturally shy away from things they do not understand. That is why, I stressed to my girls, that education is so important. Being informed allows us to make decisions that will hopefully never seem “ridiculous.”
 
While I was driving, I thought about a recent report I read concerning Americans and their IRAs. According to the TIAA-CREF annual survey on individual retirement accounts and Americans’ savings habits, only 8 percent responded that making contributions to their IRA is a priority with their retirement savings. This is probably because the number-one motivation for saving money relates to short-term expenses—like housing, appliances or a car—rather than saving for retirement.
 
In fact, according to the survey, only one in five Americans are even contributing to an IRA, and less than half of those people are contributing the maximum amount. That is staggering! If you are a regular Cutter Family Finance reader, you have learned about the value of incorporating an IRA into your financial plan. And if so, you are probably thinking that the remaining four out of those five people without an IRA look pretty ridiculous, right?
 
Hmm . . .
 
The biggest reason that many Americans don’t have IRAs is because they don’t know enough about them. They do not understand their benefits, so they don’t see the value in opening one. Believe it or not, fewer than half of respondents ages 18 to 34 can even correctly identify an IRA, compared to 57 percent of respondents overall.
 
There you have it. That pesky problem—a lack of information or blatant misinformation—rears its ugly head again, and I’d hate to be around when hindsight hits and the missed opportunities are obvious.
 
Yikes.
 
At the time of year when taxes are at the front of everyone’s mind, it’s time to pay homage to the value of an IRA and its importance to an overall retirement plan.
Now, let’s think about this. There’s a reason the government wants to limit the amount you can contribute to tax-deferred and tax-exempt retirement accounts every year. The money in such a plan grows free from the grabby hands of Uncle Sam. The income from interest, dividends and capital gains can compound each year without raining on the parade. Furthermore, you can escape taxes on either the money you put into the plan initially, or on the money you withdraw in retirement, depending upon whether you choose a Traditional IRA or a Roth IRA.
 
The TIAA-CREF survey also reported that nearly one in 10 Americans view opening an IRA or rolling funds into one as an extremely time-consuming activity. For one in 10 Americans, they view opening an IRA as more time consuming than cleaning the house, or renewing a driver’s license! I need to find out what DMV these people go to! I went to Plymouth a few weeks back and I can assure you that is not the one.
 
Again, people fear and avoid what they do not understand. This mentality has held people back in the past, and it can be devastating to your financial future. They say that ignorance is not an excuse, and that couldn’t be more true in financial planning.
Folks, take control of your financial future. Learn the questions that you need to be asking so you can make sound financial decisions. Educate yourself and don’t let your retirement plan remain stuck in the Middle Ages. Don’t be “Ridiculous.”
 
Be vigilant and stay alert, because you deserve more.