Conservative IRA

[Guest moremoney]

Ok start shaking your heads, I am clueless about money matters.

I am in my early 40's and have no retirement or savings accounts.

My employer doesn't offer 401k or retirement plans. I make very little money a year (less than $10,000), but my husband does well. I would like to open a Roth IRA but really really don't want the stress of the stock market. Even if CD's might not make as much money isn't it better to open a conservative secure something. We had money in a savings account but with the 1% interest and charging monthly fees if it fell below a certain amount, we moved the money into our checking account. My husband has a 401k. I want to be really conservative and know that the money placed will only increase as time goes by. I thought of CD's but I am pretty clueless about how they work. If you open one for a certain number of years, does the bank notify you when the term is up and what do you do then? There has to be something that is safer than the stock market but earns more than a savings account. Can anyone help?

[Guest saber]

You can be conservative in a IRA accounts as well.

Just stick to mutual funds. Most IRAs through brokerages keep your cash in a money market fund which earns some interest. The advantage with IRAs is the tax free aspect of the Roth IRA and the tax deferred aspect of the traditional IRA.

Generally you don't pay yearly/monthly fees for most IRA accounts with most brokers. You do pay fees it you buy mutual funds, stocks, bonds etc. etc.

If you are dead set against an IRA and want more interest than a savings account invest in government bonds.

http://www.treasurydirect.gov/

Click on the link for more info.

[John G]

My very first concern with your post is that you have no savings? You did not mention anything about debt. Perhaps you are just refering to your personal accounts rather than your husbands side. You may want to clarify that situation. My advice below focuses on the retirement issue but I am concerned about your cash reserves and the possiblity that credit card debt may be another issue.

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I think that your concerns about investing are completely valid issues, however you fear of the stock market is probably more related to your lack of knowledge about investments. You are going down the wrong track with your thinking what is "safe". Let me give you some reasons why you should consider a wider range of investments than just savings or CDs.

You said you are in your early 40s. You probably have a life expectancy of perhaps 40 or more years and I would imagine from what you said that you are perhaps 20 years away from retiring. While you may need some money in about 20 years, a large part of your savings will not be touched for 3+ decades. You have said you want a risk free choice that only goes up - did you know that this will absolutely guarentee you the lowest possible return over this long time period? "Safe" investments will barely grow more than the rate of inflation. Right now, many "safe" investments (like passbook and money market accounts) are not even keeping up with the rate of inflation. If you choose "safe", then after considering inflation you assets will grow a minimal amount. I don't think this is wise. A broader array of investments over this time period are very likely to give you a better result. The key is for you to understand your investment options and not be be fearful of short term results.

You did not say the amount of your husbands 401k resources are how they are invested, but it sounds like your Roth would be the smaller part. I make this recommendation assuming that you plan to put at least $1000 into the Roth this year. (if that is not true, post again) I would recommend that you use your Roth contributions for just two NO LOAD mutual funds. In the first year, you would pick one, choosing the other in the second year, alternating back and forth. The goal is to build your confidence for a systematic program. I am also going to suggest that you set this up as a fixed amount coming out of your checking account each month. Perhaps you can choose $100 for each month.

The first type of fund I am going to suggest is a stock dividend and income NO LOAD mutual fund. These types of funds invest in stable businesses that pay consistent dividends such as electric utilities, energy companies, or older blue chip firms. The second choice for a NO LOAD mutual fund would be a broadly based S&P500 or total market index fund. This type of fund owns hundreds of stocks and mirrors the overall stock market. With each of these funds, you are going to just make the contributions, check them periodically to be sure the contributions are getting recorded, AND ignor the total value. Like the infomercial "set em and forget em".... yes, that sounds stupid but I am trying to get you past your fear of the stock market. To keep things simple, I am going to suggest that your consider Vanguard mutual funds... but there are many other choices that you will find listed in Money and Kiplinger magazines. I would expect that using the above two funds that your Roth over many decades would increase on average about 8% per year - that is a long term average, not a fixed amount each year.

I am also going to recommend that you go to your local library and read the March issues of Consumer Reports - there are good articles on investing basics. You will also find good articles in Kiplinger Magazine.

How does a CD work?

I don't think you want you money in CDs for the reasons I have given above, but here is how they work. A CD is basically a glorified IOU that a bank writes. They promise to pay back your money with interest over a specific period of time. It is essentially a contract and you will get documents from the bank. Every bank I know sends you a letter perhaps 30 days before the renewal date reminding you and telling you about some of your choices. You can often renew by phone. If you do nothing, the CD usually has some default provision - like renewing for a like term.

"There has to be something that is safer than the stock market but earns more than a savings account."

No one I know expects the stock market to be a poor performer when judged over a 20-30 year period. "Safety" come from the pasage of time, which is an investors best friend.

Post again if you want more information. You may want to provide some details about the 401K plan since that is part of your retirement picture. Both you and your husband should get a social security statement to show that part of your retirement plan.