The Daily Dow
Wednesday, May 21, 1997
by Robert Sheard (TMF Sheard)
LEXINGTON, KY. (May 21, 1997) -- Congratulations! You've just retired after a successful career and some very Foolish investing. You started slowly, putting away money each month and investing in high-yield Dow stocks and fully funding your tax-deferred accounts all those years. And the impossible is now reality. You're a millionaire. Now what?
Most retired investors are well aware of the risks of stock market investments, especially if they've ridden out the cycles they've seen throughout their careers. And the fear of a loss drives many investors towards fixed-income investments. But the other threat to their portfolios is inflation, possibly 25-35 years' worth of it.
Let's assume you've retired with an even $1 million. If you need $70,000 a year (7% of that total) to pay your annual expenses (including taxes on the withdrawals you make from your retirement account), you could stick the money into a long-term bond. You'd get your 7% return, but absolutely no growth. You still have $1 million after the year is up and inflation has made the value of that total slightly less than what it was a year ago. If you compound that loss to inflation over 20 or 30 years, the effect is enormous.
You have to keep growth in mind. Even if you take a vanilla approach to the stock market and invest in an index fund, the decades-long record for the index is roughly 11% or 12%. If you get roughly 3% in dividends each year and 8% in capital gains, look at the difference after 20 years.
Your $1 million in the long bond at 7% is still worth $1 million 20 years down the road. (Remember you're spending $70,000 each year.) Put that $1 million to work in the stock market, averaging 11%, and you keep growth as a priority.
For example, after year one, between dividends and capital gains, you'd have earned $110,000. Even after paying your "salary" of $70,000, your portfolio still grew by 4% (or $40,000).
If you raise your salary by 5% each year to help offset inflation (something the bond model can't do with its fixed return), your portfolio still grows. After five years, for example, you're paying yourself a salary of $85,000 a year and your total portfolio has grown to $1.2 million. After ten years, your salary is $108,500 and your total portfolio is worth $1.4 million.
After 20 years, your salary has climbed to more than $175,000 a year and your portfolio has climbed to $1.75 million. Don't forget that this assumes only an 11% growth rate on your investments. We certainly believe you should be able to do better than that simply by investing in high-yield Dow stocks. If you assume a 15%-20% annual return (still below the Foolish Four's long-term record), you're talking about terrific growth.
Don't get caught up in a quibble about the raw numbers I've used here. Assume half a million if you like and a smaller salary. The principle remains the same: investing with growth in mind is still important even for the retired Fool. You may be playing that back nine for several decades to come. Don't let inflation send you to the caddy shack.
(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. ________________________________
Stock Change Last -------------------- T + 3/8 34.63 GM - 5/8 56.75 CHV --- 70.13 MMM - 7/8 90.88
Day Month Year
FOOL-4 -0.08% 2.57% -2.03%
DJIA -0.17% 4.02% 13.06%
S&P 500 -0.27% 4.75% 13.32%
NASDAQ +0.72% 8.96% 6.41%
Rec'd # Security In At Now Change
1/2/97 120 3M 83.00 90.88 9.49%
1/2/97 153 Chevron 65.00 70.13 7.88%
1/2/97 179 Gen. Motor 55.75 56.75 1.79%
1/2/97 479 AT&T 41.75 34.63 -17.07%
Rec'd # Security In At Value Change
1/2/97 120 3M 9960.00 10905.00 $945.00
1/2/97 153 Chevron 9945.00 10729.13 $784.13
1/2/97 179 Gen. Motor 9979.25 10158.25 $179.00
1/2/97 479 AT&T 19998.25 16585.38 -$3412.88
CASH $609.53
TOTAL $48987.28