Dollar Cost Averaging is Dreadful in Reverse
Just as dollar cost averaging is a retirement fund's friend, reverse dollar cost averaging is its nemesis. You can take steps, though, to minimize the effects of reverse dollar cost averaging in retirement withdrawals and not feel its impact later in your golden years.
Reverse dollar cost averaging is the opposite of dollar cost averaging. Dollar cost averaging is investing money at regular intervals whereby most shares are bought at a lower price and fewer purchased at a higher price over time. This can result in significant investment growth over time. Reverse dollar cost averaging is pulling money out of stock investments at regular percentages when prices are low. This causes irreparable damage to the retirement fund and should be avoided if at all possible.
Plan ahead to minimize the damage. No one can predict a bear market, unfortunately, but as you get closer to retirement, rebalance your portfolio to a good mix of stocks, bonds and fixed income investments.
Keep three years of living expenses in a money market fund which should be constantly replenished from stocks that are doing well so you can take these gains. By doing this, you are minimizing the fallout from reverse dollar cost averaging. Keep three years worth of living expenses in short-term bonds as another safety valve.
Design your stock fund to have types of stock groupings that move in different directions in the market. You can withdraw from the higher stock fund and let the struggling stock funds recover when market conditions improve.
Defer retirement. In the current bear market, it might be prudent to delay retirement as long as you can. If you lost a lot in the current stock market, you'll have time to recover your losses and diversify into other instruments later. You'll also be able to keep investing and increase your nest egg.
Things to consider:
- Give yourself time to recover from a bear market
- Have some money invested in a Money Market
- Balance Your portfolio
- There is a dearth of information on investment withdrawals compared to investing in funds so read up on what is out there
- As you get closer to retirement you should have less of your income at risk in stocks