Roth IRA: Savings vs. Certificate of Deposit

[Guest berg67]

i'm looking for some help. I searched around and didn't find exactly what i was looking for. Here's my problem(not really a problem but you'll get the picture): i'm a 21 year old college student that nows diddley about IRA's, yet a Pharmacist i work with got hooked on the idea. I've defintly decided to get a Roth IRA. What is the difference and or value between a savings or a certificate of deposit IRA? Here's the deal i don't make a great deal of money and i'm going to pharmacy school next fall '01. so only in the summer's will i be able to make limited contributions. but i think anything to get on jump on my retirement will help, correct. what is better for just sitting around???? and i don't/won't 'play the market' cause i have a weak stomach for that. I need something i can dump some money into that will eventually grow. Any help would be great.

thanks

[Michael Devault]

You're to be congratulated for planning for your retirement at such an early age. Too many people start planning too late in life and wind up sorry for the procrastination.

The main difference between a savings account and a CD is the interest rate and minimum size. Most CDs have a larger minimum size, therefore they generally credit a slightly higher rate. CDs are also less liquid, but that shouldn't be too much of a concern right now for your retirement dollars.

Since you're not inclined to take much risk, mutual funds might not be a consideration. However, a number of insurance companies offer fixed rate annuities that currently have higher rates than bank instruments. However, they also have high minimums. Depending on the size of your contribution, you may want to put it into a savings account or CD until you have sufficient accumulations to place it into a vehicle that credits a higher interest rate. And, who knows... some day, you may want to take a little more risk with mutual funds or other equity based investments.

Hope this helps. Best of luck to you!

[John G]

Your long term planning is exemplary, but it is clear you need to become more knowledgable about investing. You should consider subscribing to Kiplinger Financial as a basic mag covering investments and lifestyle issues (insurance, mortgages, etc) for younger folks. Specifically, you need to become more familiar with the range of investments. Bank deposits and CDs, while more "secure" or reliable, will give you meager results over the long term.

Since you are initially nervous about investing in the stock market, I have a suggestion for you. Call up Vanguard Mutual funds (or find them on the www) and ask for information on the S&P500 index funds. If you place your IRA assets in an S&P500 index fund, you essentially own a very small part of 500 large companies, that is a lot of "diversification". These types of funds have very low expenses and generally do not have a "Load" (front end or back end commission). You will get average market performance. Neat, simple, very little effort to monitor.

You may want to look at some of my other comments on this site that have been aimed at initial investors. While the stock market flucuates a lot over short time periods, it is a great place to be for the long haul.

Why? Because stock ownership connects you to growth and the future. In the Rx world, you can see how new ideas and new products help society. Well that is true in computer, chemical, telecomm and airline industries too.

With CDs you are "renting" your money to someone and expecting a low return but low risk. With stocks you are backing economic activity and growth and taking risk. But for growth, we would all look like Pilgrims and somberly walk around in frocks and discussing witches.... instead of living in a world where three college kids make a hand held movie on witches and become millionaires.

[Guest berg67]

thank you both for the help, i will investigate each option before making my decision. I heard of mutual funds but didn't want to have to hover over the paper every morning making sure everything was ok. but i will use you suggestions to help me retire early!!!!!

[John G]

Berg, the whole point of a mutual fund is that you buy a system or style of investing. Some of these choices can be broad based index (like the S&P500) or big cap (largest firms), small cap (young/small firms), growth, sector (like health care or telecommunications), etc.

You never want to be looking day to day at how a fund is performing or even how a stock is performing. Daily inspection often gets you into thinking daily decisions and that is not good. Investing is a long term activity. Think in terms of years or even decades.

Lots of folks forget that every time they are selling, someone else is buying... otherwise no trade would occur. Some of the smartest investors are stepping up to buy when others might be in a panic to sell. Don't get sucked into the day to day drama, the "action" portrayed by the media.

And, remember that you should focus in your early years on learning about investing rather than chasing returns.