Taking a cold, hard look at the million-dollar IRA

Think of it, at age 65 you could retire with a comfy individual retirement account -- worth a million dollars. It's right there in print. . .just like the ads say.

The ads are hard to miss. They are put out by banks across the country, and many run full-page in daily newspapers. Their simple message is this: open an Individual Retirement Account, save $2,000 a year, retire on a million.

Is this for real? Yes and no. Mathematically, these millionare ads are accurate. If you pump the maximum allowed ($2,000 if you're single, $4,000 if you're married) into your IRA at the beginning of every year, it will reach the million mark in almost 35 years. The banks arrive at this grand total by figuring a 12 percent rate of return, compounded daily - a reasonable rate in today's economy.

But what if that 12 percent rate doesn't stick around for the next 35 years? And will $1 million still be worth $1 million in today's purchasing power then? And how easily can people put $2,000 or $4,000 aside by the beginning of every year?

None of the ads guarantee the 12 percent over the life of the IRA. At Dry Dock Savings Bank in New York, which runs full-page ''millionare'' ads in the New York Times, Joseph Ludovico says the bank guarantees 12 percent interest for 18 months. Mr. Ludovico, pension services manager for the bank, says the 12 percent rate works out to nearly 13 percent because of the daily compounding.

''I feel uncomfortable about the ads,'' says Barnet Berin, director of program standards at William M. Mercer Inc., a major pension employer benefit firm. Berin says 12 percent is ''very high'' and can't be counted on to continue. ''Over the long run, interest rates have been well below 12 percent,'' he adds. It would be much better, he suggests, ''if the ads showed what would happen at low, medium, and high rates.''

Interest rates make a big difference in the end sum. Let's say the IRA was figured on 8 percent instead of 12 percent, same rules still applying. What might have been a nest egg of $2,131,620 after 40 years would come down to $612, 380, says Michael Ryan, principal and actuary at Towers, Perrin, Forster & Crosby, another pension consulting firm.

Kenneth McLennan, an economist with the Committee for Economic Development, says the ''retire a millionare'' campaign is ''a little optimistic.'' He adds: ''As the prime lending rate begins to fall substantially in the next 5 years, banks simply will not make it [the $1 million goal].''

Of course, it's debatable whether the rates will fall as Mr. MacLennan predicts. But, he says, if the prime rate doesn't fall and stays where it is (around 15 percent), the 12 percent rate of return will hang on . . . and so will high inflation. And that means $1 million will not be worth $1 million in 1982 purchasing power a couple decades down the pike.

If we assumed a 10 percent rate of inflation over the next 25 years, $1 million would be worth $58,820 in today's dollars. However, ''this country's democracy couldn't last through so many years of high inflation,'' Mercer's Mr. Berin suggests.

Mark Clark, a spokesman for the United States League of Savings Associations, says that what the ''millionare'' ads do is force people to recognize that ''self-managed retirement plans can result in a significant nest egg for everyone. It shows people how fast tax-free, compounded interest can accumulate.'' If you're in the 50 percent tax bracket, Mr. Clark says, tax-free IRA accumulation over 35 years will be nearly 10 times more than if it were taxed.

There's still the question of how many people will be able to put aside that maximum amount for their IRA every year. Many people will be opening an IRA in addition to their own employee pension plan. Barnet Berin says, ''people under the social-security wage base ($32,400) would have problems saving it.'' Michael Ryan thinks it will be done ''by people . . . whose family expenses (mortgage, car, etc.) have subsided.''

Dry Dock's Mr. Ludovico disagrees. He emphatically states that ''people wanting to carve a niche for themselves will be able to do it.'' The incentive is in the extraordinary accumulation of interest, he exclaims.

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