<THE FOOLISH FOUR>
by Robert Sheard
LEXINGTON, KY. (June 29, 1998) -- This weekend I got the kind of e-mail I most enjoy getting. A parent was asking for some information to help his child get started on a lifetime savings program. His son's nineteen and has his first job and wants help getting started. And his father wanted some numbers to convince him how important it is to get started now.
So let's look at the easiest of all possible tools, the new Roth IRA. As you undoubtedly know by now, the Roth IRA is a wonderful savings tool for young investors. You may deposit $2,000 a year (if you have at least that much in earned income) into the new Roth IRA and from that point on, the account is completely tax free, even upon withdrawal at retirement. (There are some other technical things about early withdrawal, etc., but the basics are simple.)
Starting at age 19, then, the new investor has roughly 40 years before retirement age at 59 1/2. Assuming the rules don't change and he remains eligible to contribute every year, putting $2,000 in on January 2 each year would mean a career total contribution of $80,000.
The Dow Approaches have averaged anywhere from 17% to 22% depending on what period and variation you look at historically, so let's go with the low end and assume he averages 17% a year over the duration of the investments. After 40 years, he would have (I know how ridiculous it'll sound) $6,269,044. And don't forget, that's a tax-free pot of gold.
Now, of course inflation's going to chew into that amount over the next forty years, and we can argue endlessly about what the inflation rate projection should be, so I'm just going to pick a rate and run with it. If we adjust that total amount for a 4% inflation rate, it's the equivalent of retiring today with $1,305,773. I think you'll agree that's an amazing retirement fund given the small size of the contributions and the amount of work involved.
There's no reason why anyone with a job and time on his side should retire poorly. It doesn't take a six-figure salary or an inheritance. If you're young and working, you should be able to retire in the lifestyle of your own choosing. Just get started now, when you've got the most time on your side. Fool on!
Current Dow Order | 1998 Dow Returns
[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]
06/29/98 Close
Stock Change Last -------------------- UK --- 51.44 IP -1 42.88 MO - 7/16 39.19 EK + 11/16 70.81 |
Day Month Year
FOOL-4 -0.50% -0.15% 6.36%
DJIA +0.60% 1.09% 13.77%
S&P 500 +0.47% 4.37% 17.32%
NASDAQ +1.15% 6.31% 20.42%
Rec'd # Security In At Now Change
12/31/97 291 Union Carb 42.94 51.44 19.80%
12/31/97 206 Eastman Ko 60.56 70.81 16.92%
12/31/97 289 Int'l Pape 43.13 42.88 -0.58%
12/31/97 276 Philip Mor 45.25 39.19 -13.40%
Rec'd # Security In At Value Change
12/31/97 291 Union Carb 12494.81 14968.31 $2473.50
12/31/97 206 Eastman Ko 12475.88 14587.38 $2111.50
12/31/97 289 Int'l Pape 12463.13 12390.88 -$72.25
12/31/97 276 Philip Mor 12489.00 10815.75 -$1673.25
CASH $415.96
TOTAL $53178.27
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