"Honey, I shrunk the IRA."
That's what many investors are muttering in disbelief these days. A declining 2001 stock market has significantly reduced the asset size of most individual retirement accounts, and many folks are blaming themselves.
There's no use crying over spilt tech stocks, however. Tax preparation season is still the traditional time of year to get your wits about you and formulate a strategy for existing IRA holdings and new contributions. Your past projections about your fund's future growth may now seem hopelessly optimistic.
But stopping dead in your tracks or halting your contributions will only make matters worse, since a long-term investment must be nurtured. And yes, you should still include (gulp!) stocks in your plans.
"Since people living into their 80s and 90s must have their money last that long, it's not out of line for those nearing retirement to keep half their money in stocks," said Mary Sullivan, a financial planner based in San Francisco. "If you're totally in fixed-income investments and interest rates move in the wrong direction, your income will get annihilated."
Some IRA investors seek bargains in the bedraggled markets. "My clients are astute and can see that there's a great buying opportunity now, with stocks on sale," said David Bendix, a financial planner with Bendix Financial Group in Garden City, N.Y.
"But you're also seeing the concept of asset allocation come back into favor in IRAs, with bond funds and balanced (stock and bond) funds getting much more of a look than a year ago."
Bear in mind that short-term history doesn't count for much.
"A year ago, the stock market was peaking and everyone thought it would go up forever, while today there's a downturn and everyone thinks it's going to keep going down," mused Ed Ferrara, a financial planner and president of ProVise Management Group Inc., Clearwater Fla. "Reality exists somewhere between those two extremes."
Tax-wise, there's some good IRA news about the minimum required distributions an individual must begin taking at age 70 1/2. The previous complex choices made foreign-written bicycle assembly manuals seem like good literature.
"You'll have millions of people hitting age 70 1/2, and the old system was too complicated for the IRS to effectively check whether people would be complying with it by paying the right amounts," explained Ed Slott, CPA and publisher of Ed Slott's IRA Advisor newsletter in Rockville Centre, N.Y.
The IRS has enacted these simplifications:
There's now one uniform distribution table that just about every individual will use to compute his or her lifetime minimum required distributions. All the old variables are gone and experts predict a significant tax savings under the new system. Your lifetime minimum required distribution will never be higher than that computed under this table.
One exception is if your spouse is your sole beneficiary and he or she is more than 10 years younger than you. In that case, you can use actual life expectancy for the computation instead, which is even more advantageous than the distribution table.
You no longer must have a beneficiary in place when you start distributions, and you will be permitted to change your beneficiary at any time. While you should still have a beneficiary, the identity of that beneficiary no longer has any bearing on your lifetime distribution.
"Because you can change the beneficiary anytime you want, a 95-year-old now can name a 5-year-old great-grandchild as beneficiary and that child can maybe go on another 70 years," pointed out Barry Picker, a CPA and financial planner in Brooklyn, N.Y. "These accounts can last for generations with the planning that can be done now."
Get your IRA in gear with quality investments that take advantage of low prices. A young investor's IRA portfolio, Sullivan believes, should include tech stocks such as Oracle, Cisco Systems and Sun Microsystems; telecommunications companies with good earnings, such as Nokia and SBC Communications; defense stocks such as General Dynamics, Raytheon and Boeing; and Philip Morris in tobacco.
At middle age, she'd reduce the portfolio's tech holdings from 30 percent to 15 percent, add stocks such as Fannie Mae and move into some bonds or bond funds.
Someone nearing retirement should emphasize solid companies such as Merck, American Home Products, American Express, International Paper and Sara Lee.
Bendix believes younger IRA investors should be as aggressive as possible through a diversified portfolio of value, growth, small, large, domestic and foreign stocks.
The allocation should be 80 percent stocks and the rest bonds. A person in middle age should shift to a mix of 60 percent stock and 40 percent bonds, while someone near retirement should go 50/50.
Some stocks favored by Bendix are AOL Time Warner, Pfizer, Citigroup, Home Depot, Viacom and IBM. Many investors burned by individual stocks are lately moving into mutual funds, he noted.
Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, NY 11201, or by e-mail at successinv@aol.com.