Ignore IRA Rates; Compare Yields

QUESTION: I am shopping around for an IRA and have started my search with newspaper ads. I am so frustrated because they all seem to calculate the interest rate slightly different. No matter how many times I read their ads, I can’t tell which of them is really the best deal.

I know I could run around town and ask each of them for an explanation. But I’m hoping there is an easier way.

Is there some secret to comparing rates with yields and comparing each of those things to ads that promise to double your money in a certain time period but don’t even mention the rate?--F. V.

ANSWER: There is a secret: yield. You should never compare rates with rates or rates with yields or yields with money-doubling promises. To do accurate comparison shopping, you have to compare yields. That means you need to convert to yields all of the various numbers touted in the ads.

So, either you phone or visit the banks, savings and loans or other IRA sellers you’re interested in and ask how much their IRA offerings yield, or you do the calculations yourself.

Why isn’t knowing the interest rate good enough? Because that number is only an indication of the earnings potential of your money. It doesn’t take into account how the interest earnings on your IRA savings are compounded.

How important is that? Say you have $10,000 and you’re considering three savings plans, all offering an interest rate of 10%. The only way they differ is in the compounding: once a year, once a month and once a day.

At the end of the year, you would earn $1,000, $1,047 and $1,067, respectively--quite a difference considering that they were all advertised at the same rate. Over several years (important in this case, because IRAs are designed to be long-term retirement plans) that $67 a year can make a big difference--especially because it isn’t only the principal you deposit every year that is compounded, it’s the interest earnings, too. Thus, the extra $67 you save every year earns interest at the same rate as your IRA contribution.

So, you can see why it’s so important to demand that the bank, savings and loan or other IRA seller you’re interested in convert their rates to yields. The yields on these three example plans would be 10%, 10.47% and 10.67%, respectively.

Why don’t the financial institutions just save everyone the trouble and advertise their yields instead of using gimmicks to draw people in? Because, if their compounding method is inferior to that used by their competitors, the rates or money-doubling promises make the financial instruments sound like a better deal than they really are. So don’t be surprised if some IRA sellers are reluctant to comply with your request. But be insistent.

If an IRA salesman steadfastly insists that he can’t or won’t compute the yield, go elsewhere or demand a different but equally useful calculation. Ask to what amount your money would grow in each of the next five years and by the date of your retirement if you put your money in his institution. Tell him you realize that the interest rate will change over that time but to assume for argument’s sake that it won’t. The figure should also factor in any penalties that you would be charged if you withdrew the money before the savings certificate or other financial instrument matures.

This calculation is one that IRA sellers are required to make for customers--under Internal Revenue Service orders. Nevertheless, some consumer watchdogs maintain that consumers more often than not cannot persuade salesmen to provide this information. What they sometimes get is a canned disclosure statement that details the hypothetical earnings on an IRA but at yields that bear little resemblance to those offered by the financial institution in question.

One who has devoted most of his retirement years to arguing that case for consumers is Joe A. Mintz, a retired Dallas insurance salesman who now writes a newsletter on financial issues concerning retirees. He is best known for his success a decade ago in persuading a House subcommittee to hold hearings on insurance company ads that promised high interest rates but neglected to disclose that much of the first year’s investment was lost to sales commissions. The current IRS disclosure regulations emerged from those hearings.

Fed up with what he sees as many institutions’ failure to comply with IRS disclosure regulations--and with the government’s failure to enforce its own regulations--Mintz has prepared a booklet to help consumers determine at a glance how much their IRA savings would grow in one to 50 years and at 800 different yields, ranging from 7% to 14.99%.

One section shows how savings accumulate on their own; another shows how they accumulate when a new contribution is added to the balance each year, and a third shows how much money you would need upon retirement to keep up your current standard of living, assuming various rates of inflation between now and your retirement.

The charts also enable you to determine what yield you need in order to double your money in a certain number of years.

If you’re interested enough to pay $5.95, Mintz will send you a copy of the “How to Compare Interest Earnings” booklet. Write to him at the NROCA Press, Box 12066, Dallas, Tex. 75225.

Getting back to the importance of yield, in order to use Mintz’s charts effectively, you have to know the yield.

So, don’t be shy with that IRA salesman. If you do come away empty-handed, though, ask the institution’s mortgage lending department for a rate-to-yield conversion chart, or figure it yourself if you have a good financial calculator.

With the right calculator and the guide that comes with it, you can do the conversion with only three or four keystrokes. All you need to know is the interest rate and the number of compounding periods, and the calculator does the rest.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business section, The Times, Times Mirror Square, Los Angeles 90053.