Don't be afraid to give IRA a tuneup

Mix of investments should be adjusted according to life stage

Your Money

March 07, 2004|By Andrew Leckey

Have you looked at your individual retirement account lately?

Forty-one percent of American families hold IRAs, but for many of them it's "out of sight, out of mind."

During the bear market, investors just didn't want to open the envelope that informed them their holdings had decreased. It's also easy to forget about your IRA because retirement seems far off.

The reality is that not only should you contribute to your IRA now, whether for the 2003 or 2004 tax year or both, but you should recalibrate its mix of investments.

Some segments of the stock market have been booming, and your current asset allocation might therefore be out of kilter. Furthermore, a number of investments might make more sense now than they did when you initially contributed.

"People will make the same mistakes they made in the 1990s, going against asset allocation formulas and jumping into the next hot thing," warned Ed Slott, CPA and publisher of Ed Slott's IRA Advisor (, Rockville Centre, N.Y. "Stay true to your investment model, invest the maximum allowed and you'll find you have money for retirement while others don't."

You can contribute $3,000 to your IRA for 2003 until April 15, with an additional $500 catch-up provision for those over age 50. A married couple can contribute $3,000 each or $6,000 total. You can contribute for the 2004 tax year now, too. (Before contributing, learn the differences between a traditional IRA, which is tax-deductible, and the increasingly popular Roth IRA, which gives no deduction but lets you withdraw tax-free later.)

One good sign is that, despite the bear market, the percentage of families with IRAs is up from 39.5 percent of households in 2002, according to the Investment Company Institute. They should all be monitoring their holdings carefully.

"At a minimum, look to rebalance your IRA portfolio once a year, keeping in mind that making changes any more than quarterly could result in extra costs," said Ray Ferrara, president and chief executive of ProVise Management Group Inc., Clearwater, Fla. "If your asset allocation is out of balance by more than 10 percent, think about making changes."

Younger IRA investors, Ferrara believes, can be more aggressive and invest in American Funds Growth Fund of America (AGTHX), Thornberg Value (TVAFX), Legg Mason Value (LMVTX), Franklin Small Cap Value (FRVLX), Royce Low-Priced Stock (RYLPX) or Sentinel Small Company (SAGWX).

Older IRA investors, he suggests, might invest in Dodge & Cox Balanced (DODBX), Franklin Rising Dividends (FRDPX), T. Rowe Price Equity Income (PRFDX) or American Funds American Balanced (ABALX).

"When we get a new client, we set up contributing to their IRA as a regular discipline right away," said Vern Hayden, certified financial planner with Hayden Financial Group LLC, Westport, Conn. "When people get older, they might lighten up on stocks, but no one should have less than 40 percent of their IRA in stock funds."

A good beginning for an IRA portfolio, according to Hayden, is 65 percent stocks, 25 percent bonds and 10 percent "opportunistic cash" that can be put to use when you wish. Adjust according to your individual philosophy.

In stocks, Hayden recommends First Eagle Global (SGENX) as a core holding. He'd add Thornburg Value (TVAFX), Thornburg Investment Income Builder (TIBAX), Hussman Strategic Growth (HSGFX), Forward Hoover Small Cap Equity (FFSCX) and Artisan Mid-Cap (ARTMX). In bonds, it's FPA New income (FPNIX), Vanguard Short-Term Bond Index (VBISX) and Vanguard Inflation Protected Securities (VIPSX).

Know your risk level and diversify among investments that meet your requirements.

"I've always liked `tax inefficient' funds in IRAs, such as real estate and bond funds, because there otherwise are no tax breaks for them," said Sheldon Jacobs, editor of The No-Load Fund Investor (, of Irvington-On-Hudson, N.Y. "On the other hand, a stock index fund is probably better in a taxable account because it's tax-efficient since it does so little trading."

The "wealth builder" IRA portfolio Jacobs recommends for growth-oriented investors is 90 percent stocks and 10 percent bonds. He likes stock funds Muhlenkamp (MUHLX), Baron Small Cap (BSCFX), T. Rowe Price Emerging Europe and Mediterranean (TREMX), Vanguard Total Stock Market (VTSMX) and Artisan Mid Cap Value (ARTQX) for stocks. The bond portion is Fidelity New Markets Income (FNMIX).

His "pre-retirement" IRA portfolio for those within 10 years of retirement is 75 percent stocks and 25 percent bonds, including stock funds Legg Mason Opportunity (LMOPX), Meridian Value (MVALX) and Marisco Growth (MGRIX). In bonds, he includes Harbor Bond (HABDX), Schwab Total Bond Market Index (SWLBX) and Vanguard GNMA (VFIIX).

For retirees, Jacobs recommends 55 percent stocks and 45 percent bonds. The stock portion includes Neuberger Berman Guardian (NGUAX), Schwab Dividend Equity (SWDIX) and Fidelity Equity-Income II (FEQTX), while the bond portion has the same funds as the pre-retirement portfolio.

Andrew Leckey is a Tribune Media Services columnist.

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