FOOL GLOBAL WIRE by Robert Sheard LEXINGTON, KY. (Apr. 10, 1997) -- Is the Dow Approach a suitable plan for a retired investor? I think it is, and here's why. Too many retired investors are concerned with immediate income needs instead of taking a long-term outlook. After all, even retiring at age 65, one could have decades of life ahead, so even in this stage of life, portfolio growth is as important as income. Let's look at an example using data from the last couple of decades. Retiring Renee has a portfolio (taxable) of $500,000 and wants to make sure it will last the rest of her life and leave something for her grandchildren. Her home is paid for, she has no debt, and feels she needs approximately $30,000 a year (exclusive of taxes) to live in the style she wants. Let's make a couple of assumptions for purposes of this example. First, we'll be using the Unemotional Value four-stock returns from 1971 to the present (which includes the last big bear market in 1973 and 1974). We’ll start with an annual withdrawal at the end of 1971 of $30,000 and then increase that figure by 3% a year to make some allowance for inflation. On top of that, we'll withdraw 28% of each year's gains (if any) to pay for Renee's taxes. The way this works is that the first portion of Renee's income requirements come from dividends and anything else is met by selling shares of stock at her annual update to meet the rest of the balance necessary and her taxes. In year one (1971), then, the 19.89% return brought her portfolio up to $599,450. She withdrew $27,846 for taxes and the $30,000 for her expenses, leaving a total to be invested in 1972 of $541,604. Let's zoom ahead to a condensed table for the rest of the 26 years: Year Open Return Subtotal Taxes Expenses Total 1971 $500,000 19.89% $599,450 $27,846 $30,000 $541,604 1972 $541,604 24.91% $676,518 $37,776 $30,900 $607,842 1973 $607,842 25.74% $764,300 $43,808 $31,827 $688,665 1985 $2,655,568 22.85% $3,262,365 $169,903 $45,378 $3,047,084 1996 $11,040,044 24.34% $13,727,191 $752,401 $62,813 $12,911,977 As you can see, even while providing for a growing annual expense account and paying off Uncle Sam each year out of portfolio proceeds, this approach still allows for considerable portfolio growth. Compare that to a fixed-rate investment like a bond paying 7%. On the original $500,000, the annual proceeds would remain fixed at $35,000 and the principal remains constant (losing each year to inflation). In the face of these numbers, I'm hard-pressed to buy the argument presented by most financial planners that adversity to risk is more important than portfolio growth. It seems to me the major risk such an approach overlooks is the opportunity cost of the returns available in stocks and ignores the very tangible cost of lost buying power because of inflation. Keep in mind, we're not talking about penny stocks, either. The Dow Approach chooses from among the bluest of the blue chips, the biggest and most resilient companies in the world. As far as equities go, it's hard to find a "safer" approach. So, if you're looking for a retirement option that flies in the face of Conventional Wisdom, the Dow Approach seems the Foolish choice. (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________ |
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