What's in your IRA?

In My Humble Opinion
1

I’m starting a Roth IRA, and I plan on managing it all myself.

Just wondering what other’s strategies are.

I’ve heard some people say, “go aggressive since it’s long term”. That doesn’t make sense to me on every level, but I mean. . .as agressive as something like a satellite radio stock?

It seems to me like you just want solid growth and you want to make sure the company is going to be there in 35 years. . .meaning maybe you want to buy some Coca-Cola stock or something.

A lot of people seem to have theirs in mutual funds. Is that your route?

Risky stuff? Solid stuff? Stocks? Funds?

So, if you don’t mind my asking, what’s in your IRA?

Is your strategy different for a Roth vs. a traditional?

2

I had a substantial amount in my 401K from my previous employer ($50K).

I have since rolled it over into a
10-year fixed annuity .

Money is invested in Nasdaq 100 and S&P 500. Every month they take the gain or loss % of these two indexes. If the gain is more than 3% they skim off the top. If there is a loss they take the hit and I lose nothing.
Depending on the market I can make up to a 36% return in a year or break even.
I’ll never lose my intital investment and at the end of each year your total becomes your locked investement.

3

I’m not an investment professional, but I don’t think there should be any difference in how you invest in a Roth vs a traditional IRA as both are tax deferred. As to what to invest in, I’m currently using one of the Vanguard Life-Cycle Funds, which invest in Vanguard index funds with the allocation set for your retirement age, and the allocation adjusted as your retirement age approaches. Vanguard is also well-known for having among the lowest-cost funds.

4

What kind of stock you invest in depends on how far you are from retirement age and what kind of risk level you’re comfortable with. Your retirement package should not make you nuts with worry. If you’re going to be picking individual stocks, it’s a good idea to educate yourself on investing. A good class can help, but beyond any class, you need to actively commit time to studying stocks.

If you’re not going to be able to commit the time to study, mutual funds lets someone else do the studying for you and diversifies your holdings somewhat without your having to pick individual stocks. Different mutual funds have different goals and different risk levels, so to be truly diversified, many people invest in more than one fund.

Another type of fund is a money market fund. Those are not tied to stocks but to government securities, certificates of deposits, and other financial securities. Their interest rate is low, but very secure. When the hot mutual funds are making 15%, they’ll make 4%. When the mutual funds are tanking at -15%, they’ll make 4%.

I’ve got a 457 account, just because that’s what my employer offers. It has a small amount in a money market fund (very low risk), more than half in a Large Cap mutual fund (medium risk), and the rest split between two riskier funds (one specializes in communications and the other in overseas tech). All of the funds but the money market have been tanking regularly since I started the account four years ago. I like to think of it a buying low. I’ve got enough years until retirement to make that a reasonable strategy. It would drive some folks nuts, though. A lot of the guys at work absolutely have to be in a fund that it rising.

Good luck. Oh, and I’ve heard that banks usually recommend Roths to folks over 55. Not sure why.

5

Is that so?

I don’t think it’s unusual for anyone putting together an IRA to consider a Roth.

I suspect that perhaps someone mid-50’s might be done with house payments or have college paid for so they can eat the tax on money they’re not using.

But, if you have the means to pay the tax on money you’re investing, the Roth seems to be the better option.

6

It has more to do with relative tax rates. At 55, a person is most likely at their highest earning level and their taxes are subsequently relatively high. Assuming that a retired person will not be paying as much in tax as they were when they were earning the most, then it makes sense to defer the tax payments.

7

Aren’t you saying the opposite of what Yllaria said, then?

You pay taxes when you FUND the Roth, and NOT when you take it out. So a person who is 55 would want to have the deferment when they put it in, and have the lower rate when they take it out.

I’d think your way would make a little more sense.

8

Roth IRA withdrawals are tax-free because the contributions were paid with after-tax money. So a person who has a long time to go before retirement (and a long time to build up tax-free earnings) would find a Roth IRA particularly worthwhile.

9

I’m currently reading Intelligent Asset Allocator by William Bernstein. So far it’s been an excellent read, and it makes sense. The gist of it so far (I’m about half-way through) is the following:

o Diversify your funds and try to minimize correlation. Be sure to include some bonds (significant reduction in risk with minimal reduction in return) and international (not to be confused with global) stocks (max diversity).

o Balance stock between growth and value–more diversity.

o Low cap has problems with volatility and potentially graduation from the fund to mid or large cap.

o Rebalance your allocations annually. This maintains your allocations and instills a practice of buying low and selling high.

o Choose index funds instead of mutual funds. Professional investors for the most part can’t predict the future any better than you can and the cost isn’t worth the minimal possibility of an increased return.

o Ignore current “wisdom”. What’s true today won’t be true tomorrow.

There is a lot of statistical stuff, but he explains everything pretty clearly. For me, statistics (and any other mathematical field) are easier to grasp with concrete examples, which he provides.

10

I’m not a pro, and I’m not a CFP or anything like that, so take this for what it’s worth. There are a few people (CFP types) that I’ve talked to about the Roth IRA vs. traditional IRA vs. 401(k). You should always, always, always put money in your 401(k) up to the percentage of your salary that is matched by your employer. Some have said to go ahead and max out your 401(k) contribution before doing anything else. With 401(k)'s, in most cases the interest/growth on whatever taxes you defer with a traditional will be a wash, against the interest/growth of post-tax dollars invested with a Roth. The times when it might make a difference and would make more sense to go with a Roth is when you are in a very low tax bracket early in your career.

11

We don’t have employer matching. We have a profit sharing plan, however, where out employer basically puts about 9% of our salary each year into the plan.

That’s a shitload.

You “cliff vest” on the 1st hour of your fifth year at the company, which is about 6 months away for me.

A Roth makes sense to me right now because without kids, and the ability to save a little, I can make the tax bill. If that’s true for you, it’s almost definitely better to do a Roth than a Traditional. If it takes money away from a matched 401(K), it doesn’t make any sense.

I’m just wondering what different funds/stocks/bonds people have in their Roth accounts. I’m actually thinking of going a little risky, at least the first year, and just go with some stocks. I’ve always though the whole “diversification” thing is a little overstated – it’s nothing more than a different way to avoid risk. There’s nothing inherently intelligent about it.

12

Trunk, are there any rules on how often you can change the composition of your IRA? (That’s a point I don’t know.) I thought cliff vesting was on a 3-year rule; am I missing something?

13

Many mutual fund companies have funds similar to the Life-Cycle Funds. They’re good for people who don’t want to be constantly adjusting their own allocation. If you’re interested in them, shop around because some are more aggressive than others and expenses vary.

Also, if you go to most mutual fund companies web sites, they’ll have portfolio allocation tools you can use to help you get set up. You don’t have to invest in their funds, just use the allocations.

14

FWIW - I struggled with a similar problem (what do I do!?) until recently when I went to a financial advisor. So while i’m not a financial advisor, I can tell you what I did and what my advisor said was good vs. what needed tweaking.

As far as the OP goes, I have both a Roth and traditional IRA. I started with a traditional IRA in the mid 90’s (Roth’s weren’t available then), and contributed until I reached the income where you can’t use the contributions as a deduction on your taxes. After that year, I started a Roth IRA - if I’m going to be paying taxes on the money contributed, I mine as well pay money now while it’s relatively little ($3k per year) rather then later when I take money out and have little income. My traditional IRA was with Scudder Growth & Income (SCGDX I think). I picked that one because since its inception in 1929, it had an average return of 10% - so it seemed pretty stable.

I put my Roth IRA in mutual funds that dealt with health care (Scudder Health Care - SCHLX I believe was the ticker). My reasoning was that 1) the baby boomers are getting old and going to be using a lot of drugs for the next 20-30 years - so its inevitable that the health care industry is going to profit from this; and 2) mutual funds have account managers - they get paid to pay attention to the market and buy certain stocks and keep a well balanced fund. Simply put, that was my reasoning.
According to my FA, it wasn’t faulty logic. Although my Roth IRA has been performing well, it turns out that hte fund I picked is not necessarily related to companies that make life-extending drugs. Instead they make Viagra. So that explains the profitability :slight_smile: But not what I was looking for long-term. Unfortunately, the 90’s were a time when the Growth and Income IRA sputtered a bit and didn’t do much.

My understanding is that since their inception, Roth IRA’s are the way to go. The only time to go with a traditional IRA is when you are in a financial situation where you need that tax deduction, IMHO.

As far as 401k’s go, I put in the max that I can. I work in a computer technology field, and companies in that field typically dont have very good matching - so most of the money in my 401k is my own contributions, rather the having a significant portion as matched from my employer. The max you can put in is $12k/year I believe. I have a percentage amount deducted every pay period that ends up putting away the $12k/year. If someones pay is such that they can’t do the 12k/year, then I (again, IMHO) would go for the max that your company matches. Maybe a little more if you can afford it.

If you choose to invest on your own, thats fine. I’d recommend signing up with something like morningstar.com so you can have a place to do some research. Thats what I did a while ago, and its served me pretty well. Although it turned out that my financial situation and investments were largely ok, I ended up hiring a financial advisor anyway. I’d recommend it to just about anyone. If nothing else, its nice when someone who gets paid a living doing this stuff can look at your situation and say ‘this is what you are doing correctly’ and ‘this is what needs some minor tweaking’. Also, its nice when there is someone to hold you (somewhat) accountable to savings goals. Makes you think before saying to yourself that oyu want to spend a few hundred dollars on a shiny new gadget. Fortunately I bought my iPod just before contacting the advisor :smiley:

15

Do you mean changing the composition of the profit sharing money in my company, or the IRA that I’m starting?

I don’t know what the company lets you do.

I BELIEVE (and I’d like someone to correct me if I’m wrong here) that with my IRA (which I’m setting up through Ameritrade) I can change the composition of my allocations willy-nilly. I can buy/sell stocks, bonds, funds. I can go short. I can sell all the stocks and just hold the cash in the Roth account, AS LONG AS I DON’T TRY TO CASH OUT.

My goal is to just let the company manage the profit-sharing stuff (the manager seems to do a great job with that). Just let that sit there and be boring and conservative. I want to contribute to my own IRA with my cash and manage it myself. . .and probably manage it like I manage my personal Ameritrade account.

But, that gets back to the original question. . .what do other people do with theirs? Sounds like most people don’t do it like I’m planning on doing it. Like they just have it in a couple big funds.

My plan is to try to contribute the $4k each year into the Roth and maybe get more conservative as time goes by. . .start off with some riskier stocks, play around with it, and eventually move into funds and more conservative things. Or even set one up with in teh wife’s name and in my name and play with one, and go conservative with the other.

If anyone is still reading, maybe you can answer this: Let’s say I want to buy something through Ameritrade like a Janus fund. Are there fees above and beyond the Ameritrade brokerage fee that Janus will charge because I don’t go through them? Are there some that do and some that don’t. . .like is that what a “no load” fund is all about?

Also, to Dignan a vesting schedule is just set by whoever is doing it, I THINK. You could probably have it set up to vest at 1 year, 2 years, 10 years. We start the 1st hour of our fifth year, essentially after we’ve been here 4 full years. My first job, we vested a little more every 6 months. Fully vested at 3 years.

One more point: some of you are probably thinking my plans sound a little crazy. Just jumping into handling my own IRAs without knowledge of things like mutual fund fees and whatnot. You’re right. But, for one, I don’t really like the idea of money advisors – in theory and from a little experience. For two, I think playing with $$$ is a little fun. For three, it’s still early in my life, and I like the learning experience even if I’m not squeezing every last dime I can out of it.

16

What do you pay for a financial advisor?