Here's What Happens When You Contribute $5,000 to an IRA at Age 25

When you're in your mid-20s, retirement is probably the furthest thing from your mind. At that stage of life, your financial priorities may be to pay off nagging credit card debt and start socking money away for a down payment on a home.

But if you're able to carve out a chunk of money for your IRA at 25, it could go a long way toward building a solid retirement nest egg. In fact, you may be surprised at what a difference a $5,000 IRA contribution at age 25 might make.

When you give your money many years to grow

The money you have in your IRA isn't supposed to just sit in cash. If you go that route, it won't grow very much. Rather, it's a good idea to invest your IRA so your money gets to grow at a more rapid pace.

One great thing about saving for retirement in an IRA is that you can load up on a diverse mix of stocks. With a 401(k) plan, you're generally not able to hand-pick stocks for your retirement savings. Rather, you're limited to investing in different funds that may or may not align with your investment strategy.

Meanwhile, let's say you load your IRA with 30 or so stocks across a range of market segments. Or, let's say you keep things even simpler and invest in an S&P 500 ETF, which will effectively give you exposure to the broad stock market without having to invest in 500 different companies individually.

Over the past 50 years, the stock market, as measured by the S&P 500's performance, has rewarded investors with an average annual 10% return before inflation. That number accounts for both good years and, well, not so great ones.

If you were to put $5,000 into your IRA at age 25 and leave that money alone until age 65 (which is a common age to retire at), over that 40-year period, your balance would grow to about $226,000, assuming a 10% average annual return.

Now you may want to save more than that for retirement. But even so, a single and relatively modest investment at age 25 could leave you with an astounding amount of money in time for your senior years. And that's why it pays to do what you can to fund your IRA when you're young, even if it means having to cut your spending in fun categories, like entertainment and travel.

A sacrifice worth making

Carving out $5,000 to put in an IRA at age 25 isn't easy. Heck, it may not even be an easy thing to do at age 35, when you might, at least ideally, be earning more money than in your mid-20s.

But even so, a single investment in stocks could leave you very wealthy in time for retirement if you give your money a solid four decades to grow. So it's worth making that sacrifice if you can.

You may need to live with a roommate, drive a clunker of a car, and spend some of your evenings working a side hustle to come up with $5,000 for your IRA at age 25. But your 65-year-old self might thank you profusely for making that effort.