Where to put $4500 Roth Ira?

[Guest sunshinepepper]

I am 53-yr old with only $10,000 in SepIra at ETrade to trade some stocks. Did not do well there. There is no IRA or 401k anywhere. I am thinking to put $4500 in some Roth IRA. Seek some astute input from you folks.

Have 6-month or so in emergency fund at Capital One Money Market account that pays 2.45% (through Costco deal).

Plan to work for another 15 yr or so (on 1099).

Spent all money that I had to fund two kids in colleges. Now, they are on their own, I need to fund my retirement. I know it's late, but my house and truck are paid off.

Thanks.

[John G]

Why not continue at Etrade? They absolutely have IRAs and Roths.

You made a negative comment about - "did not due well" at Etrade. That sounds more like a problem with investing in a tough market, rather than a custodian issue. I don't think it makes much sense to "trade" stocks with a 10k account, you can't have a reasonablly diverse portfolio and commission (even discount commissions) will eat up too large a percent. I am reading the tea leaves, post some clarifications if I am drawing the wrong conclusions.

I would suggest that most of the discount brokerages are very similar... likely the same low level of errors, roughly the same mutual funds, and approximately same commissions.

Yep, now that kids are gone, you need to focus on building up a retirement war chest. The $4,500 applies to you if you are over the age of 50. If you are married, filling jointly, your spouse can also contribute $4,500 if your total earned income is sufficient. (Be aware that the rules are very different if you are married filling seperately)

It sounds like you should be using mutual funds for your investments. You have more than 15 years of investing since you don't spend all of your retirement funds in the first year. Post again if you need some guidelines on finding suitable funds.

[Guest sunshinepepper]

I can put $3500 for 2004 and $4500 for 2005. E trade has IRA, but I am not sure about Roth IRA, since I cannot find it on their site.

Right now, my savings is at Capital One (Money Market Account about 2.45 %). I need to put it somewhere that it can give me some growth, but not losing the principal. I have about $38k. Is there a mutual fund pay somewhere 7 % - 8 % steady for the last 10 yr without a heavy front load and 12-b fees?

I paid average $28,000/yr for college tuition for the last 4 yrs. I can put in the same amount into savings to build up my retirement, since I don't have much to start it with.

According to SS (if the money is still there when I retire), I would get about $1,142 at age 66. I would also get $241.89/month at age 65 from my previous job.

I am not married. The only asset I have is my house, which is paid off. I do have a roommate now for $800/month and will rent another room out for $500/month. I can live on $1600/month and put most of my income (1099) into savings.

What would be my best choice? Is there a way, I can figure this thing out by myself without paying some fees to a financial planner?

Thanks,

[John G]

Thanks for the additional information.

Etrade absolutely does Roth IRAs - my daughter has had one there for 3+ years.

Growth but no risk of principal?

OK, challenging question. The simple answer is that "no risk" equals worlds worst annual returns. Why? Because you don't have to offer much to folks that are fearful of risk. Reward is related to risk. You don't want to be zero risk - crappy returns. You don't want to be high risk - high rewards.

You need to understand more about investment risk. When you do, you may be able to make good decisions. First, lets talk about two risks... risks related to failure to obtain your goals, and failure to keep ahead of inflation. Right now your money market account is, at best, staying even with inflation. The purchasing value of your money market account is roughly staying even. It will be very hard for you to have a reasonable retirement if your money does not grow in real value.

What are your choices? There are many, and a balanced approach may serve you best. Lets look at bonds, stocks and mutual funds.

Bonds: Bonds come in many flavors. All have some degree of risk both in terms of failure to get repaid and to a lesser extent failure to give you a reasonable return. Federal paper, GMAs, local general obligation bonds, local revenue bonds, corporate bonds and junk bonds are some of the main catagories. The "coupon" or interest rates on these rise as you move from the lower risk US government paper to more risky corporte and junk. Think in terms of 4% to perhaps 12%. Tax treatment also varies. Bonds can be bought in various increments, often 25K is the low end. For many, that means using bond mutual funds rather than own individual bonds. However, if you own the individual bond, you generally have the expectation of getting the full face value when it becomes due.

Stocks: There are stocks that pay fairly reliable dividends. In days of yore, this often mean owning utilities and railroads. Now there are also preferred stocks - stocks that have first call on dividends - which gives you a higher priority. Preferred stocks often have cummulative rights, which means they must get all preferred stock dividends current before awarding any dividends to common stocks. Another class of higher dividend stocks are things called REITS. You can use investor magazines and electronic search engines to looks at candidates. Some examples: Capital Automotive (symbol CARS) is a REIT that buys the land under auto dealerships and leases the properties back to the dealership. They are paying out at a 5% rate and the stock has risen over 300% in the past five years. Capital Federal (symbol CFFN - a Kansas bank) is paying out 5.5% and has also risen about 300% in the past five years. Ship Finance (symbol SFL - a Norwegian crude oil tanker company) is a very new company, paying a dividend of around 7,8%. Alert: no recommendations, these are just examples.

Mutual Funds: It is hard to buy individual stocks - it takes time to research, time to track, commission expenses, problems having a diverse portfolio. The mutual fund industry was created decades ago to address this problem. When you buy "shares" in a mutual fund, you are taking a very small ownership interest in a large basket of stocks or bonds. Soon after mutual funds were invented, someone decided to offer NO LOAD mutual funds to eliminate commissions. Then INDEX funds were invented to "automate" the selection process and reduce overhead. Now we have "sector" and "life cycle" funds. You have about 10,000 choices. You might be especially interested in less risky dividend paying funds or perhaps growth and income funds. There are also a full array of bond funds.

More material to follow in next post......

[John G]

The prior post was background on investment options, returns and risk. Since we are talking about your future, I suggest that you start reading some general info on investments and perhaps subscribe to Money, Worth or Kiplinger Financial. You did not say much about your investment knowledge - I am assuming from the level of assets and the comment about "not doing well" in stocks that learning more about investments should be a high priority.

First a question. Does your current employer have any kind of plan? If you are self employed, you should talk to your accountant about the various options you have. Any kind of company program is worth exploring and those with a matching portion are virtually always a slam dunk winner.

Kids are gone, starting to see the light at the end of the tunnel? Did anyone describe "weddings"? (A humble joke. Been there done that this past fall)

OK, assuming that you are age 53, have 38k in current assets and can perhaps bank 20k now that you are past tuition. Let me give you a quick idea of a basic plan.

1. Max out your contributions every year with a Roth if you qualify by income and filing status. Do all of this funding early in the year to maximize the tax shelter benefits.

2. Keep about 1/2 of your money market assets in the money market account as your cash reserves. Move the other 1/2 into a relatively stable income or stock/bond blend NO LOAD fund. This would be a modest level of risk and will help you build confidence.

3. Start a regular investment program with the remainder of what use to be tuition money. Put the first 10k into a index fund - giving you broad market performance. Put the next 10k into no load fund with a slight bias towards growth. Put the next 10k into a slighly more aggressive growth fund or perhaps something the focuses on medicine or technology. Automate this process - it ensures that your invest in your future first each month. This also commits you to a "dollar cost averaging" approach. In months when prices are down, you buy more.

- - - After 1 year - - - -

You should have five components to you investment portfolio and perhaps 60k. This is you "core" assets which at 8% will grow to about 175,000 by the time you are 68.

Subsequent years, divide up your post-tuition surpluses into Roth, and the five accounts. When your cash reserves are equal to about 70% of one years salary, divert additional funds to your investments. Assuming $4,500 each year in Roths and 16,000 each year in mutual funds or a brokerage account. At 8%, these addition annual investments should grow to about 500,000 by the time you are age 68.

Wait until you have doubled your current assets before you even think about individual stocks. Then be sure you know a lot about what your are doing. If you can't stand up and talk non-stop for 5 minutes about a company, getting into details about products, competitors, management, earnings, and growth (to mention only a few important things) , then you should not be owning individual stocks. My personal standard is closer to 30 minutes - but I am a stock picker by nature and I actually read 10Qs, company reports and listen to quarterly conference calls. (not exactly cocktail hour conversation)

Retirement components:

SSN say $1100/month

Investments $675,000 or perhaps $4,000/month, without touching principal.

Pension - $250/month

Home Equity - not touched, but another component of net worth.

This sample plan could give you a future monthly income of $5,350 which terms of todays purchasing power would be equivilent to about $3,300. Some of those funds would come out tax free. Others would be a mix of ordinary income and long term capital gains.

So my next question to you. Could you live today on $35,000 a year in after tax dollars if your house and truck were paid in full? If not, we can look at ways to tweak the investment choices.

I suspect that after you get a few years into this kind of plan, you will be more comfortable making investment choices and will put a larger fraction into general equities (aka stocks). My 8% annual return is a reasonable average based upon a mix of bonds, dividend paying stocks and growth stocks. I assume that the 20% cash or money market will eventually shrink to closer to 12%.

This is a sample plan - enough detail to give you one approach. I tried to respect some of your risk concerns and yet give you a plan that should nudge you along the path towards a reasonable balance of risk/reward. Plans should first be tailored to the individual and review perhaps once a year. See if these ideas address some of your concerns. Post again if you have questions.

Note, a plan is not a guarentee. On the other hand, if you start booking a 10% annual return, or live frugally, you might just need to think estate planning to avoid taxes!

Minor concerns: no mention of health insurance, possibility of losing your job, or any issues with children (Dad, I want to buy a house! The most recent proposal from the recently married daughter.)

Do you need a financial planner? Maybe. I am a great believer in self-help. Investing is not the same as brain surgery or representing yourself in court. You can take adult ed classes. There are hundreds of books to read (Schwab, Lynch, ONeil, and other authors) that you can find at the local library. You can join a local investment club - if you can stand the sitting around and long winded discussions. Websites are another source. Not all financial planners are knowledgeable or ethical, so there are practical issues in selecting one. It is YOUR money, and frankly who is most concerned about making it grow? I think the answer is you.