``Here a million and there a million, and pretty soon you're talking about real money.'' The words are attributed to the late Sen. Everett M. Dirksen of Illinois, but they are beginning to apply, on a much smaller scale, to individual retirement accounts. A husband and wife, for example, who have both made the maximum $2,000 annual IRA contributions every year since IRAs were opened to the general public in 1982, could have $16,000, plus interest, in their retirement funds as of this year. At that level, financial planners say, it's time to begin thinking about diversification.
``In some ways investing in an IRA is no different than any other kind of investing,'' says Joshua Young, a vice-president in the trust division at State Street Bank in Boston. ``We definitely agree that diversification is a sensible thing to do. If you're going to invest in stocks or equities, you should also invest in some kind of fixed income security.''
When IRAs were first opened to the general public, the idea of investing in stocks at all seemed foolhardy to many people. This is, after all, retirement money we're talking about, and in retirement planning, that means security, which means caution.
``Many people started with product IRAs,'' says Dodge Dutcher, director of trust services at Shearson Lehman Brothers Inc. ``A person would go to the bank and open an IRA with CDs. An awful lot of people started with these safe-decision vehicles.''
But that is changing. Now, partly due to falling rates on certificates of deposit and the strength in the stock market, stocks and mutual funds have been getting the lion's share of the growth. In 1984 the fastest-growing segment of the $140 billion-plus IRA market was ``self-directed'' accounts, growing from 9.2 percent of the market in 1983 to 12.1 percent. Self-directed IRAs are usually held by brokerages and thus permit customers to buy and sell stocks and bonds. The share of self-directed IRAs matches the 12.1 percent held by mutual funds, which grew from 9.9 percent in January 1982, according to the Investment Company Institute, the mutual fund trade group. This left mutual funds and self-directed accounts with over 24 percent of the IRA market, up from about 20 percent the year before.
That still leaves banks, thrifts, mutual savings banks, and credit unions -- institutions in which virtually all deposits are insured -- with over 65 percent of the IRA market.
But even these institutions are looking for ways to serve the IRA customer who wants diversification. At Bank of America in San Francisco, for instance, a ``multi-rate accumulation account'' permits switching money between a bank account, a mutual fund, or a discount brokerage account through its Charles Schwab subsidiary. New York-based Citicorp also offers discount brokerage services for IRAs, as do a growing number of banks and thrifts around the country. Citibank figures to have 10 to 15 percent of its IRA customers in mutual funds, stocks, or bonds by the end of the year, says Cindy Colitti, assistant vice president at the bank.
The willingness to take on a little more risk with an IRA can also been seen in the expanded list of offerings from insurance companies, brokerages, even from seemingly unlikely places as firms selling limited partnerships in real estate and equipment leasing. With 20, 30, or more years to save, more people are recognizing that even a small difference in yield can mean a lot more money at retirement.
``People are not looking so much for diversification as improvements on return,'' says W. Wesley Howard, editor of the IRA Reporter, a trade newsletter. While it is possible for an individual to have $8,000 plus interest in an IRA this year, most are much smaller than that, so diversification is not yet an issue. Near the end of last year, he figures, the average IRA contained only about $3,500.
Even with that amount, though, higher yields can make a difference in the long run, Mr. Howard argues. ``Outside of an IRA, a difference of half a percentage point or one percentage point is not enough to make more risk worth the effort. But within an IRA, a minor difference in interest rates over 20 or 30 years will make several thousand dollars of difference.''
Many people, however, don't have 20 or 30 years before retirement. They should not be thinking about taking on additional risk. If you plan to retire within five years, for example, buying stocks for your IRA could lead to disaster if the market loses strength suddenly. A younger person has time to wait for the market to give back losses and provide new gains; an older one does not.
Likewise, an older person should not tie up funds in investments that take a long time to mature, like long-term bonds or limited partnerships.
Some financial advisers, in fact, advise against using the IRA as a place to try out newer or riskier investments. ``If you want to take risks, do it in your personal account, not in the IRA,'' recommends Barbara Drebing, a partner at Kaufman & Drebing, a Philadelphia investment advisory firm. Because the earnings in an IRA are tax-free, so are the losses, she notes. ``You can't take capital gains or losses in the IRA,'' which eliminates one of the important incentives for buying riskier investments in the first place.
Mr. Dutcher of Shearson Lehman Brothers agrees. ``Professionally, I'm not sure I approve of the more daring approach,'' he says. ``In a general account, you can write off losses if the stock drops. There is no credit for these losses in an IRA.''
That does not mean this brokerage executive is against having any stocks in an IRA as long as people recognize that some are more appropriate for an IRA than others. Stocks with a long history of steady growth and dividend payments fit this standard, he says. And because ``money can't come out of the IRA without penalty, you have money eligible for full-cycle market work.''
If you still want to take some risk within the IRA, one way is to put a small portion of it into a growth stock or aggressive mutual fund. Some people may be able to sit back and watch the performance, which might contain wild price swings, and remain calm. Others will find themselves getting very uncomfortable with the same trends. If you find yourself in the latter group, retreat to the safer investments.
Mr. Howard at the IRA Reporter also urges caution when going into unfamiliar investments. Although limited partnerships are available, he notes, not that many people -- especially those who plan to depend on the IRA as their primary source of retirement income -- know enough about these investments to pick the good deals from the bad ones.
One way to balance risk and security could be used by a husband and wife who have their own IRAs. ``You could leave the husband's IRA in time deposits, and put the wife's in stocks,'' suggests Warren Branzburg, vice-president for retirement products at Bank of America. This way, you can try new investments and increased risk while the other IRA is safely earning market-level interest rates.
If you do keep all or part of your IRA in time deposits like CDs, keep close tabs on them. One-year yields are now running between 9.5 and 10 percent, but last year they were in the 12 percent range. Instead of simply letting your bank roll your old 12 percent CD into a 9.5 percent successor, consider looking for a better deal elsewhere.
That may mean another bank or a savings and loan. Or it may be a mutual fund or a brokerage, two busineses that have been advertising heavily to capture people who are dissatisfied with the performance of their IRAs as well as those who are looking for diversification.
For investors who want to diversify but don't want to keep track of several separate accounts, mutual funds are the easiest way to go. Even if you invest with a single fund, your risk is spread among dozens of securities managed by professional investors. Spreading your investment around is even easier in a ``family'' of funds where you can put some money in a money market fund, some in stocks or bonds (choose your degree of risk), or some in government securities. In a no-load fund group you can move between different funds without having fees deducted for every switch.
The attractiveness of mutual funds is a major reason banks and S&Ls are offering them, whether through their own brokerage subsidiaries or through outside discount brokers. But since an important criterion for selecting a mutual fund is long-term performance, people interested in a fund for a long-term IRA relationship may want to keep this in mind before moving over to a fund set up to capture IRAs.
Wherever you go, there are some things that need checking before signing up for the new account. For example, all institutions offering IRAs are required to provide a disclosure statement showing how $1,000 a year deposited in an IRA will grow until you reach age age 70.
But the statements provided by some of these firms may be using a slightly higher yield on the disclosure statement than is currently available to the customer. This may be simply a matter of failure to update the calculations when rates change, but whatever the reason, it is worthwhile to double-check the rate on the account with the figure on the disclosure statement. Not doing so could mean a difference of nearly $100,000 after 40 years of $2,000 annual deposits. Chart: 1982Percentage of households owning IRAs: 8% Under $15,000 25% $15,000 - $29,000 40% $30,000 - $39,000 66% $40,000 - $49,000 62% $50,000 - and over Total households: 27%