The Daily Dow
Wednesday, October 1, 1997
by Robert Sheard

LEXINGTON, KY. (Oct. 01, 1997) -- If there were ever an ally for the young investor, it's the Roth IRA. Yesterday I wrote about this new alternative for retirement savings created in the 1997 tax code reforms. Today I want to demonstrate just how crucial starting early is in making such a plan work.

Meet Alisa and Xena. Both women are 22 years old, recently graduated from college, and working for the same company. After attending a company-sponsored financial planning seminar, they learned all about the new Roth IRA. Alisa decided to get started right away, investing $2,000 at the beginning of each year. Xena's eyes glazed over. After all, she's only 22 and paying off all those student loans. Why should she put $2,000 into an account she won't touch for decades when there are cars to buy and trips to take to Club Med? Retirement savings can wait.

After six years, Alisa unaccountably decides to stop adding the $2,000 each year. (Not a Foolish move, you might say, and I'd agree. But there you have it. Human nature is inexplicable.) Xena, however, wakes up and realizes she better get going if she plans to have anything but cat food in her pantry come retirement. For the next 37 years, Xena stashes her $2,000 per year into a Roth IRA.

The ladies reach their retirement party at age 65 and sit down to reminisce. Xena, convinced that her 37 years of saving will have blown away Alisa's meager six years' worth, brings up the topic of retirement plans and vacation homes. She gradually steers the conversation towards the value of their Roth IRAs so she can gloat a little.

Care to guess who has the last laugh? Let's look at the details. Alisa saved $2,000 a year for the first six years and then let her account grow without further additions for the next 37. Assuming a 15% return each year for the entire 43 years, her retirement fund would be worth $3,546,023, even though she only invested $12,000. Remember, in this account, there are no deferred taxes hanging over her head. That final sum is tax free.

Xena, on the other hand, put $2,000 a year away for 37 years, starting in year seven, a total of $74,000. But by delaying her start for those six years while Alisa was saving, Xena's total when she retires at age 65 is only $2,685,244. Again, this assumes 15% returns each year.

Simply by starting early, Alisa ended up with 32% more money than Xena, despite investing only 16% as much. Time, Fools. Time is the key. If you're eligible for the new Roth IRA and can't invest in a deductible regular IRA, start in January when the Roth becomes available. It's the perfect vehicle for your Dow Approach stocks because you get all the growth of the Dow Approach and don't have to pay a penny of taxes on the returns.

By the way, if either woman had invested $2,000 each year for all 43 years, she'd have had a total of $6,231,267 (at 15% a year). For those of you inflation hawks, that still represents over $2 million in today's dollars if you assume a 3% annual inflation rate. I don't personally know anyone who couldn't retire on a $2 million portfolio. Since the entire account is tax free, even a 10% return would generate an annual salary of $200,000 in today's dollars. That may not do it for Bill Gates, but for me, it sure would pay for a lot of greens fees. You need more? The answer is simple. Save more. Fool on!

(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    +   1/4   44.31
GM   +1        67.94
CHV  +1 13/16  85.00
MMM  +1  3/4   94.25

           Day   Month    Year
                  Day   Month   Year
        FOOL-4   +1.35%   1.35%  17.74%
        DJIA     +0.88%   0.88%  24.30%
        S&P 500  +0.86%   0.86%  28.98%
        NASDAQ   +0.27%   0.27%  30.93%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  153 Chevron       65.00     85.00    30.77%
   1/2/97  179 Gen. Motor    55.75     67.94    21.86%
   1/2/97  120 3M            83.00     94.25    13.55%
   1/2/97  479 AT&T          41.75     44.31     6.14%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  153 Chevron     9945.00  13005.00  $3060.00
   1/2/97  179 Gen. Motor  9979.25  12160.81  $2181.56
   1/2/97  120 3M          9960.00  11310.00  $1350.00
   1/2/97  479 AT&T       19998.25  21225.69  $1227.44


                             CASH   $1167.51
                            TOTAL  $58869.01