As IRAs grow, savers take on investments -- and new risks

Six years. This is the sixth year individual retirement accounts have been available to all workers. In that time, you could have saved $12,000 for your retirement, plus interest, if you could afford the maximum deposit. If not, you could put aside less but still get the tax write-offs, and earn tax-free yields.

When they started, IRAs were promoted as the route to a secure retirement. Put away $2,000 a year and you'll be a millionaire, the ads told us.

Well, the hyperbole and interest rates have both been reduced down considerably, and the easy route to an IRA fortune has become a bit more rocky. Now, as the two-sided sword of interest rates makes cars and homes more affordable, it also means you have to look hard to find a bank paying more than 9 percent for an IRA. Most aren't doing much better than 7 or 8 percent.

So now there's something new to consider if you want to keep your IRA yields aloft: risk.

For many people, this is an acceptable idea. They have seen all the ads for banks, brokerages, and mutual funds, and have read hundreds of newspaper and magazine articles about IRAs, so the idea of taking on more risk for something as important as retirement savings is no longer quite so foreign.

As a result, the IRA is quickly being regarded as an investment, rather than a savings account.

Last year, for example, the number of IRA dollars in banks, mutual savings banks, savings and loans, and credit unions rose more than $33 billion, but the share of the total market for these institutions fell 3.4 percent, according to the IRA Reporter, a Cleveland newsletter.

For mutual funds and brokerages, it was a different story: their share of the market advanced 4 percent, as brokerages like Merrill Lynch, E. F. Hutton, and Paine Webber opened several thousand new IRAs every week.

The banks aren't in any danger of losing the IRA business, however; they still own more than 63 percent of it and are working hard to keep that share.

``The key is that people are looking for a high yield,'' says James Smith, marketing manager at Scudder Stevens & Clark, a Boston group of no-load mutual funds. ``In 1982, you could get CDs at a bank and lock in high yields well into double digits. Now, with interest rates close to half what they were, people are willing to accept a little more risk and are moving to mutual funds and self-directed IRAs with brokers.''

Also, if both a husband and wife have made their full IRA contributions each year, and that money has made a good return, a $30,000 balance is not out of the question. With that kind of money, you can afford to break it up into several pieces that stand on several levels of risk. Some financial advisers say you can do this with as little as $12,000 or $15,000. When and how much you diversify depends on several factors including your age, other assets, and other obligations, like college for the children.

``There's no rule of thumb for everybody on risk,'' points out Steven B. Enright, a fee-based financial planner in Hillsdale, N.J. ``It depends on each person's circumstances and if the IRA is going to be needed to supplement social security and a pension, or if the person has other assets they can use for retirement.''

In general, Mr. Enright says, younger people who have 20, 30, or more years left until retirement can probably take on more risk than someone who only has 10 or 15 working years remaining. For those in between, there should be a balance of some risk-free investments, and some with more potential for growth.

``The younger the client is, the more time they have to overcome losses,'' agrees Michael E. Leonetti, a financial planner in Arlington Heights, Ill. ``But in general, my philosophy is to be conservative. You can't deduct loses in a tax-deferred account.'' Dangers of uninformed risks

One problem with the idea of taking on more risk is that many people don't know what they're doing.

``We're seeing more people who call and ask `What interest rate does your fund pay?' '' says Jack Thompson, secretary-treasurer of the Janus Fund in Denver.

``They see an ad that says we had a gain of 20 percent a year, and they think that's the yield. They just don't understand how a mutual fund works.''

``We're finding that a percentage -- not a significant percentage -- but some IRA participants do not appreciate that a mutual fund is not a guaranteed investment like a CD,'' adds Bruce Behling, vice-president of the Strong Funds, a group of no-load funds in Milwaukee.

Those bastions of conservativism, the banks and thrifts, have done their part to fuel the interest and desire for more risk, by promoting their new self-directed brokerage accounts. These accounts are offered through arrangements with outside brokers or mutual funds or through a brokerage subsidiary set up by the bank.

Even some credit unions, the once-stodgy havens of small offices, small loans, and small yields, have gotten into the higher-risk IRA game. Earlier this year, the Credit Union National Association (CUNA) began offering its members the services of a discount broker.

As of mid-February, about three dozen credit unions were offering self-directed IRAs where customers could buy stocks, bonds, mutual funds, and zero coupon bonds for their retirement accounts, says Cheryl Farrell, marketing director for CUNA Brokerage Servies Inc.

Like discount brokerage services offered through banks and thrifts, the brokers at the credit unions cannot offer any advice or help select the right stocks to suit an individual's risk tolerance or financial needs. Even if those needs dictate a very conservative IRA strategy, people who go to discount brokers at banks, thrifts, or credit unions should remember that the money they invest with these brokers is no longer insured, unless they buy a government-guaranteed investment. Charting the self-directed route

For some people -- more sophisticated people, it is hoped -- self-directed brokerage accounts may be quite suitable. While losses can't be used to offset gains as they can outside the IRA, a self-directed IRA can present good opportunities for people who have a few years to recover from losses and who know what they're doing.

And for those who really know what they're doing, limited partnerships, once regarded as nothing more than tax shelters for the wealthy, hold growth potential. Since the universal IRA became available, several limited partnerships, especially in real estate, have begun stressing their income potential and downplaying the tax-sheltering angles.

``People should be willing to take some risk,'' says Gerald W. Perritt, president of Investment Information Services and editor of two investment newsletters in Chicago. ``Because along with increased risk comes increased return.

``If you take some risk over the long term -- like over 10 years -- then the risk in a sense disappears.'' Over this long a period, he contends, returns in the stock market will outpace those available from a bank or a money market fund.

Even some older investors should be taking on some risk with their IRAs, Mr. Perrit believes. ``If a person is 60, he's apt to live another 24 years,'' he said. ``So even older people should have some long-term investments. At some point, you want to be completely risk-free, but until you're 60 you could easily be 80 percent in common stocks or common stock mutual funds. After 60, you might begin shifting some of that to a money fund or CDs.'' Taking careful steps out of CDs

For now, however, much of the money shifting from CDs to mutual funds isn't going to stock funds; it's going to funds that have some of the same virtues asmoney funds and CDs. These funds stress income and security of principal by investing in government-guaranteed securities, like mortgage-backed certificates. Other funds invest in high-yield bonds where the risk is greater but professional management may reduce the risk.

In almost all cases, you should use no-load funds for IRAs. If you're only putting in $2,000 a year and you have to pay an 8 percent sales fee, you're losing $170 off the top, which must be earned back before you're up to $2,000 again. You're not paying for better management or investment performance with a load -- studies have shown that load fund managers don't do any better than no-load managers -- you're just paying for the commission of the broker who sold you the fund.

If you know nothing about mutual funds, however, and want the advice of a broker or financial planner you trust, the load may be worth it. Later, when you've gained expertise, you can switch to a no-load. If you do use a load fund, ask if there's something for less than 8 percent. Putnam Financial Services in Boston, for example, has a 4 percent load on its income fund, says Patricia Bruno, IRA product manager.

The final decision about risk is up to you. If you have any doubt about taking on more risk with your retirement nest egg, don't. ``If you can get 8 or 9 percent on long-term CDs at a bank, your money is going to double in nine years or so, without all the trouble and fuss,'' says Robert Person, a banking analyst with Coopers & Lybrand, an accounting firm. He has his IRA at a bank in 18-month and three-year CDs. ``This is my safe money, not my risk-bearing money.''