In tax-deferred retirement plans, don't be too cautious


December 27, 1992|By JANE BRYANT QUINN

New York -- Tens of millions of Americans are now managing their own pension money in tax-deferred retirement plans.

The rolls include 19 million participants in 100,000 401(k) corporate savings or profit-sharing plans (a 64 percent increase in plans since 1988), and many millions more in Individual Retirement Accounts and tax-deferred plans for teachers, government employees and the self-employed.

As the number of self-managed plans has been rising rapidly, traditional pension plans have been on the wane: About 146,000 plans offered workers fixed monthly payments at retirement in 1988, down 25 percent between 1985 and l988 (the Labor Department's latest data).

This change represents a huge, and unfair, shift of investment risk. If a corporation invests pension money badly, it's responsible for correcting the loss. If your personal retirement investments do poorly, however, 100 percent of the loss is yours. You are truly taking your life in your hands, and without any systematic training in how to make long-term investment decisions.

The average investor is excessively cautious. Too much of the money naps in fixed-interest vehicles. Not enough is invested in stocks for growth. To help right this balance, here are some principles to follow:

* In any one year, the stock market is risky. But after every decline, stocks eventually climb to new heights, so there's virtually no risk to money left in stocks for many, many years. As measured by Standard & Poor's 500-stock average, your chance of losing money over 10-year periods is only 1 percent, says Ibbotson Associates in Chicago. Your chance of gaining 10 percent to 20 percent annually is better than half.

Younger employees should be 75 percent to 100 percent invested in well-diversified stock-owning funds, with most of the rest of the money in bonds, says Chris McNickle, a principal in the Connecticut consulting firm Greenwich Associates. In middle age, you might drop to 50 percent or 60 percent stocks.

For those past age 60, Brian Ternoey, a principal in the consulting firm Foster Higgins, makes this suggestion: Estimate how much money you will need to help finance three full years of retirement, and keep that amount in bond and money-market funds. Leave the rest in stocks. More conservative investorsmight keep five years' worth of retirement income in money funds and bonds.

* Don't try to "time" the market by switching your money in and out of stocks. Instead, allocate a certain percentage of your money to stock funds and stick with it.

For example, say you're comfortable with 80 percent stocks and 20 percent bonds, a combination that yielded an average compounded 11.9 percent return from 1947 through 1991. Say, further, that the stock market sinks, until your stock fund accounts for only 70 percent of the total value of your 401(k) plan, IRA or Keogh account. At year-end, you should "rebalance" your plan, by switching money out of bonds and into stocks, until 80 percent of your investment is once again in stocks.

Conversely, if the market rises, you would sell some shares in your stock fund at year-end and put that money into bonds, again restoring the 80/20 split. With this approach, you are always buying stocks low and selling high (investment nirvana) as well as holding your market risk at a constant level.

* Keep no more than 10 percent of your 401(k) in the stock of the company you work for, McNickle says. It's risky not to diversify.

Keep stocks in your plan -- but diversify, to spread the risk.

(Jane Bryant Quinn is a syndicated columnist. Write her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.)

3' 1992, Washington Post Writers Group

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