how to conservatively invest Roth?

[bemused]

Hi everyone. We have the bulk of our retirement, primarily 403b, in Fidelity and Vanguard funds. We also have Roths, and the last two years have put our new contributions into cds. Are there better places to invest our Roth contributions conservatively, with very little risk where the return would at least keep up with inflation? I have looked at TIAA traditional but am wary due to their very poor record of customer service. Retirement is 20-25 years away. Thanks much for your advice and suggestions!

[jIM_Ohio]

Hi everyone. We have the bulk of our retirement, primarily 403b, in Fidelity and Vanguard funds. We also have Roths, and the last two years have put our new contributions into cds. Are there better places to invest our Roth contributions conservatively, with very little risk where the return would at least keep up with inflation? I have looked at TIAA traditional but am wary due to their very poor record of customer service. Retirement is 20-25 years away. Thanks much for your advice and suggestions!

You want to conservatively beat inflation? That is an oxymoron.

If you want to meet or beat inflation, you need to focus on growth based investments.
If you want to invest conservatively, you will lose money to inflation.

Bonds generally are maybe 1% over inflation historically. Bonds are best used to have portfolio remain stable in value.

If you are 25 years to retirement, I would suggest focusing on growth for retirement investments, The degree to which you invest for growth is the part of discussion which you need to look into. Growth means you try to beat inflation... but there will be some volatility- meaning one year could be a -5% return and the next year might be a +30% return, the average will be between 7-11%, depending on the degree to which you invest for growth.

How are your current retirement accounts invested? % stocks % bonds % cash? How come you would not invest Roth the same way you invest the other monies? The Roth money should be (if possible) the money which will grow the LONGEST and be the BIGGEST because that growth will "never" get taxed.

If you know the % stocks and % bonds of your other accounts, that defines the degree to which you try to grow (for example 100% equity will grow more than 80% equity and 20% bonds, and 80-20 will grow more than 60% stocks and 40% bonds.

All your retirement accounts should have the same focus/ allocation of % stocks and % bonds. Focus on that technique and your answer for how to invest the Roth should be more obvious.

[Scanner]

CD's are getting .45% in return, that won't keep up with inflation.

I'd at least go with high quality bonds (AAA corporate, treasuries, etc.) to keep up with inflation. Even Series EE savings bonds (I guess you can put them in a Roth. . .not sure if that's an appropriate product for a Roth tho)

Whether you want to try to surpass inflation or not is up to you.

[disneysteve]

What about TIPS? Those are inflation-protected Treasury bills. By design, they adjust their return to keep up with inflation. You won't make money but won't lose it either. At least that's my understanding of how it works. Perhaps someone else can give a better explanation or go to the TreasuryDirect website and educate yourself.

[jpg7n16]

By design, they adjust their return to keep up with inflation.

s/b adjust their return and principal to keep up with inflation.

Basically, they pay you interest each year based on the value of the principal, and also the princpal grows at the rate of inflation.

From: Institutional - TIPS/CPI Data

Treasury Inflation-Protected Securities, also known as TIPS, are securities whose principal is tied to the Consumer Price Index. With inflation, the principal increases. With deflation, it decreases. When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater.

TIPS pay interest every six months, based on a fixed rate applied to the adjusted principal. Each interest payment is calculated by multiplying the adjusted principal by one-half the interest rate. Follow the links below to view detailed data on the CPI numbers for various time periods.

I think TIPS are a good addition for a conservative portfolio, but I wouldn't say 100% TIPS. That's too much. 20 years is still a long time away, and an ample timeframe for equity investments.

[disneysteve]

Thanks for clarifying that, jpg. I wasn't exactly sure of the details.

OP is only talking about how to invest the Roth money so doing that 100% in TIPS might be okay since the bulk of the retirement money is in the 403b which sounds like it is invested more aggressively. OP, you should have an overall asset allocation in mind and work around that. Keep in mind that since Roth investments are not taxed in retirement and 403b investments are taxed in retirement, you are actually doing things backwards. It is better to have your growth investments where they won't be taxed and your fixed income investments where they will be taxed since they will generate a smaller tax bill.

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I think if it were me and I had a substantial sum in both, I'd be more aggressive with the Roth and be more conservative with the 403(b).

I would rather at the end of my career/retirement have my Roth be higher than my 403(b) since 403(b) monies will exit taxed.

[jIM_Ohio]

Thanks for clarifying that, jpg. I wasn't exactly sure of the details.

OP is only talking about how to invest the Roth money so doing that 100% in TIPS might be okay since the bulk of the retirement money is in the 403b which sounds like it is invested more aggressively. OP, you should have an overall asset allocation in mind and work around that. Keep in mind that since Roth investments are not taxed in retirement and 403b investments are taxed in retirement, you are actually doing things backwards. It is better to have your growth investments where they won't be taxed and your fixed income investments where they will be taxed since they will generate a smaller tax bill.

Steve- I want to expand some points you made indirectly

In general if you have tax advantaged accounts, put highest growth investments where they will NOT get taxed. Small cap stocks and International funds, for example are higher growth than large cap stocks or bonds.

In general if you have taxable accounts and tax deferred accounts you want bonds in tax deferred and stocks in the taxable. This is because the typical tax people pay on stock gains is 15% when income tax is 25% or 28%... and that 25% or 28% rate is what interest on bonds will be taxed at.

In this case OP has only tax advantaged accounts, so the goal should be something along lines of small cap and international stocks funds in the Roth, and all other asset classes in the 403b.

If situation is different, shoot for lowest tax bill and highest growth investments in Roth.

[ea1776]

If you want more conservative with still some growth, I'd go heavy in domestic dividend stocks, especially in a tax-deferred account, as Jim eluded to. You get the slow moving blue chip type companies which will pay you a juicy yield (and you can just keep re-investing the dividends), without worrying about paying taxes on those distributions. My favorite would be VIG Vanguard Dividend Appreciation, which will always be a basket of companies who have a great record of paying/increasing dividends over time. Very low expense ratio to boot !

With your long time horizon, I'd be investing in mostly stocks, then of course adjusting things as time goes on.

[bemused]

Thanks everyone for your thoughts.

We really are looking for something safe and conservative with this little bit of Roth investments. In context, the bulk of our retirement savings are about 75% stock funds, 25% bond funds. The little bit of recent Roth investments we're looking at are just the last two years of contributions and currently represent ~5% of our retirement savings. Future contributions to our Roths will continue to be a small portion of our total retirement savings contributions for each year. Our current cd rates are 2.75% and 2.6%. I have a little bit of an older 403b in TIAA traditional which earns 3.35%. It may not be rational, but the rest of our retirement savings have been bouncing around so much, that it's comforting to have a small corner of our retirement savings in something very conservative. I had checked out the TIPS information online earlier but found the info a bit confusing. I guess I should go look at that again. I had not thought about investing our Roth funds with our 75-25 allocation and instead carving out a small corner of our 403b savings into something very safe and conservative instead. This is a good idea, and thanks to those of you who suggested it. I have been reluctant to shift more funds to the TIAA traditional because there appear to be numerous complaints of very poor customer service, but I am finding it hard to find anything very safe that yields better than 3.35%.

[jIM_Ohio]

Thanks everyone for your thoughts.

We really are looking for something safe and conservative with this little bit of Roth investments. In context, the bulk of our retirement savings are about 75% stock funds, 25% bond funds. The little bit of recent Roth investments we're looking at are just the last two years of contributions and currently represent ~5% of our retirement savings. Future contributions to our Roths will continue to be a small portion of our total retirement savings contributions for each year. Our current cd rates are 2.75% and 2.6%. I have a little bit of an older 403b in TIAA traditional which earns 3.35%. It may not be rational, but the rest of our retirement savings have been bouncing around so much, that it's comforting to have a small corner of our retirement savings in something very conservative. I had checked out the TIPS information online earlier but found the info a bit confusing. I guess I should go look at that again. I had not thought about investing our Roth funds with our 75-25 allocation and instead carving out a small corner of our 403b savings into something very safe and conservative instead. This is a good idea, and thanks to those of you who suggested it. I have been reluctant to shift more funds to the TIAA traditional because there appear to be numerous complaints of very poor customer service, but I am finding it hard to find anything very safe that yields better than 3.35%.

My suggestion is 3 fold

1) increase your cash deposits (do you have an emergency fund? if so, how big relative to monthly expenses?
2) invest the Roth in the same 75-25 allocation as other retirement accounts
3) if you do not like this advice, increase #1 to make #2 feel right.

Logic- You feel like you are taking on more risk or too much risk than you are comfortable with. Therefore I suggest you do not have enough taxable liquid savings (this may or may not be correct, but it is a hunch).

If you have $1000 in your emergency fund, and you spend $4000/mo in expenses, try boosting EF to $12,000, then ask this same question- how would you invest Roth?
If you have $12,000 in EF now and expenses are same $4000/mo, make the EF be $24,000 (6 months expenses) then invest Roth just like other accounts.
If you have a decent EF (maybe 6-12 months expenses) and you still feel 75-25 is too aggressive, then either
a) lower allocation of whole portfolio down to 60-40
b) pay down debt like cars and house to reduce risk profile

The return on paying down debt will be higher than investing in cash
paying down debt will also reduce risk profile more than holding cash or turning 75-25 into 60-40 allocation.

The advice to put growth investments into the Roth is still correct. The issue is moving money around to make that the right decision. Take a step back, look at what financially is concerning you risk wise (is it the debt, the size of the EF, or something else?).

Very few parts of managing money can be made in isolation. The goal should be high growth investments in the Roth as the "detailed choice", however before getting into that level of detail, you need to make sure the higher level plan and decisions are in line. Take a step back and analyze more about financial picture than presented thus far. Debt and cash would be where I would start.

[Scanner]

Listen to JimOhio. . .he is wise.

My Roth is my "fun" part of my portfolio - extremely aggressive.

My SEP-IRA is actually very boring - just in a Target fund (it's very small at this time anyway). HOwever, I am going to max contributions to my SEP-IRA in the next 25 years like you (you sound my age) but do the most aggressive playing in my Roth.

Now. . .that being said. . .we are always back to "risk tolerance."

I totally get it you are adverse to market and principal risk (but willing to assume inflation risk). If you are risk adverse, you are risk adverse. I don't think it's our role to try to change who you are and if you are going to perform the 70's rendition of "Freak Out" everytime the market swings, just put your money in some TIPS or Treasury Bills.

That being said, seriously reconsider having your 403(b) being more conservative (you could post what funds are offered here) and doing the 75/25 mix in your Roth, if you want to go more conservative with your portfolio.

It's hard to hang out here sometimes as a lot of us are market risk mavens here - super aggressive. Nothing wrong with being superconservative either.

Good luck.

[jIM_Ohio]

Listen to JimOhio. . .he is wise.

My Roth is my "fun" part of my portfolio - extremely aggressive.

My SEP-IRA is actually very boring - just in a Target fund (it's very small at this time anyway). HOwever, I am going to max contributions to my SEP-IRA in the next 25 years like you (you sound my age) but do the most aggressive playing in my Roth.

Now. . .that being said. . .we are always back to "risk tolerance."

I totally get it you are adverse to market and principal risk (but willing to assume inflation risk). If you are risk adverse, you are risk adverse. I don't think it's our role to try to change who you are and if you are going to perform the 70's rendition of "Freak Out" everytime the market swings, just put your money in some TIPS or Treasury Bills.

That being said, seriously reconsider having your 403(b) being more conservative (you could post what funds are offered here) and doing the 75/25 mix in your Roth, if you want to go more conservative with your portfolio.

It's hard to hang out here sometimes as a lot of us are market risk mavens here - super aggressive. Nothing wrong with being superconservative either.

Good luck.

Good post.
Hopefully OP sees that it's OK to be conservative, just don't use the Roth for that direction.

If retirement allocation is 75-25, the Roth+403b+any other retirement account needs to be 75-25
If 75-25 is wrong, focus on that allocation first, the figure out 403b/Roth/other allocations later.

The best retirement plan is one which is super aggressive and then SLAMS on the brakes about 8-12 years before retirement (think 75-25 for 30 years, then 12 years before retirement shift to 40-60 or 25-75). Gradual changes lower returns without lowering risk much from year to year. Over time the risk changes, but in general within 12 years of retirement you start planning for it much more than you do when its 30-40 years away.

[bemused]

jIM, we have about $40K cash (cds) in emergency savings, corresponds to 6-9 months of expenses. Mortgage is paid off. No car or cc debt. We have 20% of our gross salaries going into our 403b each month. And we're setting aside a fair amount for college savings regularly as well. The hub is in charge of our 403b investments, and is quite aggressive with those, thus the 75-25. And they currently represent ~94% of our retirement savings. Logically, I know the 75-25 is the right way to go with the bulk of our retirement savings because of the time frame. I know it's not logical to have a small corner set aside in something very conservative, but it is comforting. The only very conservative option we have available within our 403b is the TIAA traditional, so I guess I'll need to consider shifting a bit more to that and reinvesting the Roth funds as aggressively as the bulk of our 403b. I think I understand our risk tolerance reasonably well. Perhaps I am not the typical poster here; I've enjoyed lurking here for months because there's a lot of advice which confirms we are on the right track and also some cautionary tales. For the most part I feel that we are being rational and responsible about money. The recent Roth contributions are a "bonus" because we don't qualify for either tax-deductible IRAs or regular Roth contributions, but I started making contributions to after-tax IRAs the last couple of years in anticipation of the ability to convert to Roths which we were allowed starting this year. This is why our Roths are such a small percentage of our overall retirement savings, and while others might be more conservative in their 403b and more aggressive in their Roths, because of the relative amounts of funds in each we have been more aggressive in our 403b and more conservative in the Roths. I'm glad for the reminder that the Roth tax advantage means I should reverse this thinking, which means for our risk tolerance I should carve out about 6% of our 403b and put those into something more conservative and then put our Roths into the same 75-25 allocation mix. I know 6% may not sound like much but future contributions will still be $10K a year, so that percentage will increase slowly each year, and while some of you might consider your Roth as "mad money" to invest more aggressively than your other funds, we consider our Roths as "mad money" to invest more conservatively than our other, more aggressively allocated, retirement funds.

I just wanted to know if anyone here had any suggestions for other conservative investments, since I know we want to have a bit in those to match our risk tolerance. My current options are the 2.6% cd, and the 3.35% TIAA traditional. I don't understand TIPS or T-bills well enough to know if they are a better option. Does anyone here have an opinion about that?

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I know it's not logical to have a small corner set aside in something very conservative, but it is comforting.

There's nothing illogical about that desire at all.

Judging from your post though, it sounds like there is some "marital tension" that is normal in stuff like this.

Women tend to be conservative and men tend to be more aggressive so it sounds like you would like to have control over this Roth IRA and your husband has control over his 403(b) (and forgive me if I am taking liberty with marital interpretation).

Maybe there is a compromise here (if I am right), and all marriages should have compromises:

A. Have your husband open up a Roth IRA and be aggressive with it.
B. Have your husband then redeploy his 403(b) to more conservative funds (doesn't have to be cash but maybe a 60% bond/40% stock mix)
C. You purchase AAA insured muni bonds (very conservative) in your name of different maturities.

As just a side note, and I know you aren't thinking this way, but I am throwing it out there just for your consideration. . .it doesn't matter who has what in who's name. . .it's all "joint assets" in teh marriage in case of divorce.

I just got divorced and we had 2 Roths, a 403(b) my wife had, and her pension. I walked away with my Roth and she walked away with her pension, 403(b) and her small Roth, each appraised at just about equal amounts.

I know you aren't thinking along those lines but I am just stating you perhaps need to man the "conservative" part of investing and let your husband handle the aggressive part.