How Dollar-Cost Averaging Changes in Retirement

Doreen Patrick — Thu, 04 Feb 2016 22:34:58 +0000

In your accumulation years, when you were adding dollars and buying equities at a bargain, you benefited from what is known as dollar-cost averaging: the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. Eventually, the average cost per share of the security will become smaller and smaller. Dollar cost averaging lessens the risk of investing a large amount in a single investment at the wrong time.

For example, you decide to purchase $100 worth of XYZ each month for three months. In January, XYZ is worth $33, so you buy three shares. In February, XYZ is worth $25, so you buy four additional shares. Finally, in March, XYZ is worth $20, so you buy five shares. In total, you purchased 12 shares for an average price of approximately $25 each.

Now, in retirement,as shares go down in value, you have to sell more of them from your account to obtain the same income. It’s dollar-cost averaging in reverse. Think of it as dollar-cost ravaging. See our previous post concerning this.

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How Dollar-Cost Averaging Changes in Retirement