Thursday, November 06, 1997
by Robert Sheard
LEXINGTON, KY. (Nov. 6, 1997) -- Every generation bemoans the fact that it can't interest the next generation in important matters until it's too late for the knowledge to do any good. Well, we're going to change that. So all you parents with teenagers who work part-time and who are uninterested in learning about investing, tie them down at dinner tonight and read them these facts. If this doesn't excite them, they're hopeless.
Starting in January, as you undoubtedly have heard by now, Congress has given us a new type of Individual Retirement Account -- the Roth IRA. It allows you to invest up to $2,000 each year (as long as you have earned income of at least that amount). You can't deduct the contribution on your income taxes as you may be able to do now with the old IRA, but get this: once it's in the Roth IRA, the money grows completely tax free... forever. (At least that's the current rule. Who knows what Congress will do in the future?)
Why should teenagers be drooling about this rather than lining up for the next over-priced rock concert? (Yeah, I'm getting old, I know, but I hated rock even when I was your age, and if anything, it's gotten worse.) Let's look at how this could play out.
Let's say you're sixteen years old and making a couple of thousand each year from your part-time work and you don't really have anything to spend it on. (If you're paying for college in a year or two, more power to you, but if you're blowing it on junk, wake up!) Let's stick $2,000 each January starting in 1998 into a Roth IRA and see how it might grow using a basic four-stock Dow Approach like my Unemotional Value variation.
Since 1961 (two lifetimes ago for you), the UV4 approach has averaged approximately 18% return a year, so we'll use that long-term average to compute our little estimate. Plain and simple. Invest $2,000 a year, update your holdings every year, and crank out an average return of 18%.
Care to guess how much money you'd have at retirement (age 60 according to the IRS rules)?
Are you holding on to something? How about $22 million!! (Actually, it's $22,494,522, but what's a half million between friends?)
That's right, if you sock away just $2,000 a year (less than you're making now as a part-time french-fry slinger) for the next 45 years and achieve an average return of 18%, you can retire with a tax-free pile 22 million bills high. And that's if you don't do any other saving your entire career.
Still think investing is boring? Fool on!
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________
Stock Change Last -------------------- T - 1/8 47.94 GM - 3/16 66.50 CHV - 1/2 84.25 MMM + 1/4 93.25
Day Month Year FOOL-4 -0.23% 0.58% 20.23% DJIA -0.12% 3.24% 19.15% S&P 500 -0.50% 2.56% 26.63% NASDAQ -0.85% 1.87% 25.75% Rec'd # Security In At Now Change 1/2/97 153 Chevron 65.00 84.25 29.62% 1/2/97 179 Gen. Motor 55.75 66.50 19.28% 1/2/97 479 AT&T 41.75 47.94 14.82% 1/2/97 120 3M 83.00 93.25 12.35% Rec'd # Security In At Value Change 1/2/97 479 AT&T 19998.25 22962.06 $2963.81 1/2/97 153 Chevron 9945.00 12890.25 $2945.25 1/2/97 179 Gen. Motor 9979.25 11903.50 $1924.25 1/2/97 120 3M 9960.00 11190.00 $1230.00 CASH $1167.51 TOTAL $60113.32