Monday, December 01, 1997


The Daily Dow
by Robert Sheard

LEXINGTON, KY. (Dec. 1, 1997) -- A reader wrote to me last week looking to help his son plan not only his retirement, but also to prepare to buy a home some day. His son is a young investor, age 20, and the father wanted to know if his son could set up a Roth IRA next year with the Dow Approach and then pull money out in the future to help make a down payment on his house. His query was about the long-term effects of doing so.

So let's lay out some assumptions first. Let's assume that his son is planning to buy this house in about a decade and will be putting the maximum $2,000 a year into his Roth IRA in the meantime. (The Roth IRAs will be available starting in 1998 and the growth from them is entirely tax free at retirement). As a hypothetical return, let's assume 18%, which is just under the annualized historical return for the four-stock Unemotional Value approach since 1961 (nearly 37 years).

At the end of ten years, at age 30, his Roth IRA will have grown to $55,510. As I understand the rules for the new Roth IRA, once the account is five years old, you may take out your money tax-free and penalty-free to buy a first house.

If our investor takes out $20,000 for his down payment, his Roth IRA is reduced to $35,510. We also have to assume he doesn't have an additional $2,000 to add to his account in year eleven since it would have gone into his house down payment. But starting again in year twelve, he resumes his annual $2,000 deposits.

By the time he hits retirement at age 60 (the same time his house would be paid off if he gets a traditional 30-year mortgage), his Roth IRA will have grown to a massive $6,671,029.

So even though he pulled out over 35% of his portfolio's total value ten years into the forty-year sequence, because he started early and continued saving, not only was he able to get into his first house with money he had saved in his Roth, he was able to generate a tax-free retirement fund of nearly $7 million. Even after factoring in inflation over the forty years of his Roth IRA growth, that's an impressive retirement fund.

So while taking money out of one's Roth IRA does hamper its total growth (without taking out the $20,000 after year ten and including a deposit in year eleven, his total would have grown to nearly $10 million), it's not necessarily fatal to one's long-term goals. If dipping into your Roth IRA is your only option to come up with something as important as a home down payment, it's worth considering. (Of course you'd be better off if you can leave the Roth IRA alone and come up with the down payment money some other way, but sometimes that option isn't open to you.) Just be sure to get right back on track with your annual deposits and keep investing Foolishly with your favorite Dow Approach strategy. Ah, to be 20 again and have the Roth IRA as an option. Take advantage, Fools!

TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    +1  1/16  56.94
GM   +  13/16  61.75
CHV  -   9/16  79.63
MMM  +1  3/16  98.63

           
                  Day   Month    Year
        FOOL-4   +1.13%   1.13%  27.51%
        DJIA     +2.43%   2.43%  24.27%
        S&P 500  +2.03%   2.03%  31.59%
        NASDAQ   +1.88%   1.88%  26.31%

    Rec'd   #  Security     In At       Now    Change

   1/2/97  479 AT&T          41.75     56.94    36.38%
   1/2/97  153 Chevron       65.00     79.63    22.50%
   1/2/97  120 3M            83.00     98.63    18.83%
   1/2/97  179 Gen. Motor    55.75     61.75    10.76%


    Rec'd   #  Security     In At     Value    Change

   1/2/97  479 AT&T       19998.25  27273.06  $7274.81
   1/2/97  153 Chevron     9945.00  12182.63  $2237.63
   1/2/97  120 3M          9960.00  11835.00  $1875.00
   1/2/97  179 Gen. Motor  9979.25  11053.25  $1074.00


                             CASH   $1409.35
                            TOTAL  $63753.29