<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (March 19, 1998) -- Following my article on managing a retired investor's stock portfolio, I received a few e-mail questions regarding a specific situation where such a retiring investor hasn't yet reached age 59 1/2 (lucky for him) and has a sizeable portion of his portfolio in an individual retirement account.

I hesitate to call this a problem, of course. But it does raise the question of how to juggle the decisions about how to pull out that 5% to 7% of your total portfolio that you'll need in a money market account for the next year's spending.

In all of the cases I was asked about, the retiring investor had from four to eight years before reaching 59 1/2 -- the government's minimum threshold for withdrawing money from a retirement account without penalty. (Actually, it's possible to get money out of your IRA before that age if you establish a specific pay-out plan based on their rules, but this may not be what you want to do. See your tax advisor for details.)

Let's take a case where the IRA is worth $500,000 and the taxable portfolio is worth $500,000, and the annual spending need is 5% of that total (or $50,000).

It's best to treat the money in both accounts as if it were one master portfolio for the sake of managing your stock selections. Let's say you're buying twenty stocks. In this case, it's easy; $50,000 goes into each position.

If you have $300,000 in your IRA and $700,000 in a taxable account, though (or vice versa), you'd buy six stocks in your IRA and fourteen in your taxable account. In other words, forget that it's two accounts for the purposes of selecting and allocating your money across all the positions.

When it comes time to withdraw the next year's spending needs, though, pull the money out of the taxable account as you're making your annual adjustments.

For example, our investor with $500,000 in each account might see them each grow to $575,000 after a year (15% increase). To withdraw 5% of the total of his master portfolio, our hypothetical retiree would take $57,500 out of his taxable portfolio to plunk into a money market account for next year. That leaves $575,000 in his IRA (still growing tax-deferred or tax-free) and $517,500 in his taxable portfolio. Because his gain was 15% and he's only pulling out 5% of the new total, even the half that is absorbing the entire withdrawal still showed a net gain for the year. Of course, in a poorer year, this won't be the case.

The new total is $1,092,500, so each of the twenty stocks for the following year should be worth approximately $54,625. Obviously he won't be able to buy exactly ten stocks in each account and have his numbers come out perfectly even, but don't sweat the small discrepancies.

The point is to keep roughly equal dollar amounts in each of the 20 stocks, but pull the annual spending needs out of the taxable portfolio first. This is true even after age 59 1/2 because you'll want to protect the tax-sheltered portfolio as long as the government will allow you to.

Basically, as long as the period before you're able to touch your IRA isn't too long, and as long as the majority of your portfolio isn't hidden from you in the IRA, you can easily pull out your annual spending needs from you taxable portion until you hit the magic age. But then again, who said you have to retire at all?! Fool on!

[Robert Sheard is the author of the forthcoming book, The Unemotional Investor, due out from Simon & Schuster on May 12. To pre-order your copy, please visit Amazon.com, where it's available at a discounted price.]

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   +   1/2   47.44 
 IP   -   1/8   50.00 
 MO   -1        41.44 
 EK   +   3/8   62.44 
 
 
                    Day   Month    Year 
         FOOL-4   -0.17%   0.11%   5.26% 
         DJIA     +0.32%   3.01%  11.31% 
         S&P 500  +0.39%   3.85%  12.29% 
         NASDAQ   +0.65%   1.67%  14.62% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     50.00    15.94% 
  12/31/97  291 Union Carb    42.94     47.44    10.48% 
  12/31/97  206 Eastman Ko    60.56     62.44     3.10% 
  12/31/97  276 Philip Mor    45.25     41.44    -8.43% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  14450.00  $1986.88 
  12/31/97  291 Union Carb 12494.81  13804.31  $1309.50 
  12/31/97  206 Eastman Ko 12475.88  12862.13   $386.25 
  12/31/97  276 Philip Mor 12489.00  11436.75 -$1052.25 
  
  
                              CASH     $77.19 
                             TOTAL  $52630.38