Friday, July 26, 1996
How Much Is Enough?
by MF DowMan

To many people, the 18th- and 19th-century notion of gentlemen and gentlewomen being able to live off of their property is an ideal. And although in previous eras the "property" was more likely to be tangible real estate than intangible property like stock ownership, the idea of retiring at a fairly young age on one's investment portfolio is still a goal many of us dream about, even if unrealistically.

Just what would it take, though, to make such a dream a reality? Of course the answer will be different for each investor, based on things like cost of living, taxes, and the like, but let's play a hypothetical game anyway.

Suppose you decide that you need $75,000 a year to live on. (Of course, $75,000 in 20 years won't be the same as $75,000 is today, but then again, one hopes that at retirement, all of the big debts like mortgages and college tuition for kids are in the past.)

How large would your portfolio have to be to support $75,000 a year? Assuming a 20% average annual return, you would need approximately $375,000 in your portfolio to achieve your spending goal. Of course, you can't guarantee that each year will bring in 20% growth, so it's probably a safer bet to add a year's spending requirements to that goal, so let's say $450,000 is your target.

If you have a portfolio worth $50,000 today, how long will it take to get to that target of $450,000? Again, let's assume an average growth rate of 20%. It will take just over 12 years for your portfolio to grow from $50,000 to $450,000. Again, let's be conservative to make sure your retirement fund is really large enough to support your $75,000-a-year "salary." Let's say you can wait an extra few years before you retire, letting your portfolio grow for 15 rather than 12 years.

After 15 years, your portfolio would be worth $770,000, well above your target. And with that starting amount, it would only take 10% growth to meet your spending requirements, leaving the rest of the portfolio growth to continue compounding each year.

So, with a modest portfolio, 15 years, the Dow Dividend Approach, and reasonable spending needs, it really isn't out of the realm of possibility to retire early on one's investments. Keep in mind that I've left out the most important element in retirement planning -- saving regularly. This hypothetical model assumes that nothing is added to the portfolio through the years. The quickest way to reach one's financial goals is steady saving along with a sound investment approach. Save on, Fool!

Transmitted: 7/26/96