Roth IRA for Dummies, please!

[shibabigk]

Sooo, from reading here and looking around a bit, it seems that I should open a Roth IRA. We have some credit card debt that we are working on, should all be paid off by December next year (unless the unexpected happens), working on our EF, I am putting in my 401 K what my company matches, and now it seems the next thing is the IRA.
I get some parts of it, the whole tax stuff an all that, but am completely cluesless about investing, what to choose and why it is such a great thing to do, seeing that I could lose everything that I put in.
If I start contributing now (still 40 years lef until retirment), couldn't I end up with less than if I used CDs or the sock in the matress?
How safe is this? As you can probably tell, I am the very conservative investment type
So, what to do? Can I pluck up the courage to do this? Who can I talk to that will give me an honest explanation of what would work best for me?

Thanks!

[disneysteve]

A Roth is just a type of account that is handled in a certain manner for tax purposes and retirement. Think of it as a basket. What you choose to put in the basket is up to you. If you are a super-conservative investor, you could put CDs or even a money market account in your Roth basket. There is no requirement that you must invest all or even part of the money in stocks.

That said, most folks here and elsewhere, myself included, will tell you that with 40 years until retirement, you need to invest for growth. Otherwise, you will have less money at retirement than you invest due to the effect of inflation. If a CD pays 2% and inflation is 3%, you lose 1% of your investment every year. If a diversified portfolio of stocks and bonds yields 7% and inflation is 3%, you gain 4% per year and will end up with a lot more than you invested. That's your goal.

[MonkeyMama]

If you regularly contribute to a mutual fund for 40 years, it is unlikely, if not impossible, to end up with less money in the end. (Something like a stock index, anyway - I am sure there are bad/risky funds out there). Point is if you contribute every month, quarter, year, you buy in at the highs and the lows. Not just the highs.

It's important to tax shelter the money. Put it in a CD if that is what you prefer - but a CD or money market can be a ROTH, as Steve said.

For the long run, I would started contributing monthly to a "target retirement fund." You can open one at T Rowe with merely a $50/month commitment. With time you will see it blow your cash out of the water. But they also take care of the stock/bond mix, etc. So it's just an easy way to start.

We put most of our money into the market in 2000/2001 (when I had a 401k) and 2007/2008 (as our finances improved post-children). Worst times to invest!! We still have gains over the long haul because we bought so much after the crashes, too. Not sure we would have opportunity to buy so low, otherwise. IT just evens out.

[disneysteve]

If you regularly contribute to a mutual fund for 40 years, it is unlikely, if not impossible, to end up with less money in the end.

I agree. The big problem today is that lots of naysayers are focusing on the fact the for the past 10 years, the market was essentially flat. In reality, that is an extremely rare occurrence and there has never been a 20-year period with negative returns. When you are talking about a 40-year investment window, you are all but guaranteed to make money.

[shibabigk]

Thanks guys. I am just such scrady cat.

[MonkeyMama]

I agree. The big problem today is that lots of naysayers are focusing on the fact the for the past 10 years, the market was essentially flat. In reality, that is an extremely rare occurrence and there has never been a 20-year period with negative returns. When you are talking about a 40-year investment window, you are all but guaranteed to make money.

They also assume you "only" invested at the peak.

Dollar cost averaging is good for scaredy cats. It really and truly removes a large amount of volatility from your investment portfolio.

[disneysteve]

They also assume you "only" invested at the peak.

Very true. This gets totally ignored in all of the reports. I've been investing since 1992. Trust me. Our portfolio has done just fine over the past 17 years despite anything that happened in 2007 and 2008 or the 7 or 8 years before that. Why? Because we didn't dump all of our money in back in 1998. We've been investing over time through dollar cost averaging. Even if the Dow or S&P had 0% return for 10 years, that doesn't mean anyone's personal portfolio didn't make money. Plus, all the shares we picked up over the last couple of years as the market was tanking have done very nicely so far this year with the S&P up 20% YTD and the Dow up 12%.