Thursday, May 28, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (May 28, 1998) -- I've been getting a lot of e-mail from readers requesting more information about retirement investing strategies and rules-of-thumb. Some of what I have to say is old hat to veterans of the Workshop, but given the number of new readers we see entering the Fool each month, I'd like to go over this ground again from time to time.

Conventional Wisdom tells the retired investor to pull out of stocks partially, if not entirely, because the fear of portfolio losses sends them looking for safety. My objection to this practice is that the so-called "safe" investments are historically lousy investments and run another risk generally ignored in such advice -- the risk of losing to inflation.

I'm in Peter Lynch's camp, which means I'm of the opinion that if one has saved adequately and invested well before retirement, there's no reason to pull out of common stocks after leaving the work force. We've all seen the numbers showing that stocks are the best long-term investment, and retirement for many folks is measured in decades, not just a few years. Given that fact, investing with continued portfolio growth in mind is vital to one who's living off of a portfolio's returns.

So, how much does it take to retire? My rule of thumb is to determine how much you need to spend per year right now. That includes everything you must pay in a year, including income taxes. Subtract any pensions or social security checks you receive from that total. That gives you the amount you have to generate with your investment portfolio each year (in today's dollars).

Multiply that number by twenty and that's how large your portfolio must be for you to retire today. (If your annual spending needs change in the future before you retire, your retirement portfolio target will change as well.) For example, if you've determined that you need $60,000 a year in retirement right now, and $25,000 of that is provided by social security and pension plans, you need to generate $35,000 a year from your investments. That requires a portfolio of $700,000 to accomplish this comfortably.

Once you've retired, I stress limiting your annual withdrawals from your portfolio to 5% of your assets (thus the reason I had you multiply your spending needs by twenty). Even with the most basic High-Yield 10 approach (as I demonstrated in my Foolish Four column on April 3), such a plan would allow you to stay ahead of inflation, even if you had started your retirement right as we headed into the worst bear market (1973-1974) since the Great Depression.

An even better portfolio strategy, however, would be a twenty-stock large cap portfolio, blending the Value strategy from the high-yield Dow stocks (and perhaps the Beating the S&P stocks as well), and a large-cap strategy bent on growth (such as the Keystone or Cash-King approaches).

Such a plan of limited annual withdrawals, remaining fully invested in twenty quality Blue Chips, should keep you well ahead of inflation and provide you with the kind of cushion necessary in bear markets so that you can live off of the proceeds from your portfolio indefinitely.

Other writers, even Foolish ones, may disagree with my thoughts on this subject, but that's what makes a market. I believe what I've laid out is conservative enough to protect the retired investor against market downturns, but also aggressive enough to protect against inflation -- the two biggest dangers to the retired investor. Fool on!

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[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]