Thursday, January 25, 1996
Is It Too Late, You Party Animal?
by MF DowMan

A college roommate of mine called the other day when he found out what I do for a living these days and wanted some advice. Well, that's not completely true. . . he wanted a miracle!

My roommate (I'll call him Mr. Animal to give you a picture of the kind of student he was in college) is my age--35. He's finally settled into a decent job, somehow persuaded a lovely woman to marry him, and they have no children. (They aren't planning to, either. She says the Animal's enough of a child for her.)

They just bought their dream house and were able to lock in a nice fixed-rate 30-year mortgage at 7.25%. They both work, but their combined income is fairly modest, and by the time they set aside an emergency fund, their investment account (which is parked in a money market IRA) totals $5,000. And with the new mortgage payment and their car loan, Animal doesn't see how they can save more than $100 a month in the future.

Is it hopeless for the Animals? Let's find out.

Let's take their $5,000 IRA and put it into our favorite conservative retirement strategy---Beating the Dow (BTD4). Over the last 25 years, BTD4 has compounded at an annual growth rate of 21%, so we'll use that figure for our calculations. In addition, the Animals can invest another $100 a month in their IRA account, $1,200 a year. (Since Beating the Dow only trades once a year, we'll leave the $1,200 idle in the IRA until the next portfolio rollover.)

Since the Animals want to retire when their house is paid for and they reach age 65, let's compound that IRA account for 30 years. When the banker hands the Animals the paid deed to their house, their IRA will have grown to. . . wait for it. . . $3,256,589!!!! That's right. . . $5,000 down and $100 a month for 30 years at 21% grows to $3.3 million.

But wait!, I hear you say. Won't bread cost $50 a slice in 30 years? Ah, too true, inflation hound. So let's account for it, too. If we account for an annual inflation rate of 3%, that $3.3 million 30 years from now would be worth $1,341,672 in today's dollars. If at retirement, then, the Animals stick the whole shooting match into a simple S&P 500 Index fund averaging 10.5% a year, they'll be able to retire on an average annual salary of $140,876 in today's dollars---without ever touching the principal.

Or even better, if they remain Foolish and keep the money in the Beating the Dow Four, they can retire on an annual average salary of $281,751 in today's dollars---considerably more than they ever made on the job!

Needless to say, Animal was thrilled to hear this, but not nearly as thrilled as his wife, who has to keep answering to her mother for why she married this guy in the first place. Now she has the retort she's been looking for---"He's going to make me a millionaire!"