The Daily Dow
Monday, November 10, 1997
by Robert Sheard

LEXINGTON, KY. (Nov. 10, 1997) -- Fools are huge proponents of lifetime savings and personal financial management, but sometimes your options for those savings can get confusing. So let me walk through one example today, based on a real-life example I have run across many times.

Our hypothetical married couple are both employed full-time. Her job is through a university that has a mandatory 403b account. That is, 5% of her gross pay each month is automatically invested in her 403b. In addition, the university matches her contributions, not just one-to-one, if you can believe it, but two-for-one. (This is a real example; I'm not just dreaming wishfully.) So, if her monthly contribution is $150, the university kicks in an additional $300.

His employer offers a 401k retirement plan, but it doesn't match contributions. In both cases, the investment choices are a range of mutual funds. Both plans include an index fund.

Given the plans in effect for this couple, what should their first retirement priorities be?

First and foremost, they have to take advantage of her 403b. Even if this plan weren't mandatory, this would still be the best first line of savings. She's earning a 200% return on her contribution the first day it is invested as a result of her employer's matching contributions. And it's tax-deferred. So putting this money in an index fund is a wonderful strategy. You'll be hard-pressed to find a better plan. But since the university's matching offer stops with that first 5% of her salary, she should stop the contributions there, too.

His 401k might not be market smashing, but it is not horrible either. The best option he has is a tax-deferred index fund and he gets no matching contributions from his employer. In terms of total after-tax return, he might be able to earn a better return by buying Dow Dividend Approach stocks in a taxable portfolio and paying the taxes as he goes -- but there is some risk here. It assumes that the Dow Approach continues to beat the overall market return by the 6.0% margin it has enjoyed over the last 36 years. If this outperformance margin diminishes, the loss of the tax-free compounding benefits could make for a lower average rate of return over a long enough period of time. Yikes!

So where else can they turn? The new Roth IRA (available starting in 1998) should be their second line of savings each year. Because of her participation in an employer retirement plan, they're probably not going to be able to deduct any contributions to a regular IRA on their income taxes, so turning to the new Roth IRA makes sense. Under this plan, each of them can deposit $2,000 a year into their IRAs and invest the money as they wish through their favorite brokers, and the growth is entirely tax free. (They already paid taxes on the $2,000 when it was earned.)

Finally, after they fund her required 403b plan and the two Roth IRA accounts, any savings beyond that should go into a regular taxable stock portfolio.

So for this couple, here's the list of priorities for placing their regular savings:

Her:

Him:

(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. ________________________________

TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    +   7/16  48.38
GM   +  11/16  65.44
CHV  +   5/16  83.81
MMM  +1        94.00

           
                  Day   Month    Year
        FOOL-4   +0.99%   0.80%  20.49%
        DJIA     -0.38%   1.48%  17.13%
        S&P 500  -0.69%   0.71%  24.35%
        NASDAQ   -0.73%  -0.18%  23.21%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  153 Chevron       65.00     83.81    28.94%
   1/2/97  179 Gen. Motor    55.75     65.44    17.38%
   1/2/97  479 AT&T          41.75     48.38    15.87%
   1/2/97  120 3M            83.00     94.00    13.25%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  479 AT&T       19998.25  23171.63  $3173.38
   1/2/97  153 Chevron     9945.00  12823.31  $2878.31
   1/2/97  179 Gen. Motor  9979.25  11713.31  $1734.06
   1/2/97  120 3M          9960.00  11280.00  $1320.00


                             CASH   $1257.01
                            TOTAL  $60245.26