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Why Dollar Cost Averaging is Dangerous in Retirement

We are all told, repeatedly, that over time the market will gain about 11 percent average annual yield.  This is not true when you follow the money you invest year-to-year.  If you do track, you will find the cash result is only 3.8 percent because you must overcome downturns in the market.  
To counteract concerns over these losses, investment advisers will say, “when the market goes down, just keep buying lower-priced shares so that your average purchase price is less, which helps post bigger gains when the market goes back up.” This is called “Dollar Cost Averaging.”
Now let’s apply this suggestion to a person aged 72 who is taking money out of retirement savings to live on.  If the market drops, then taking money out means you will run out of money quicker.  When withdrawing, you can’t make up for losses when the market takes a downturn because you aren’t purchasing lower-priced shares in hopes of making more money later on those cheaper stocks — your purchasing days are over, for heaven’s sake at that age! You’re trying to live on what you’ve already purchased and invested prior to this and are withdrawing money, not putting more in!  Thus, dollar cost averaging does not make sense for retirees.
I therefore suggest that while you may use dollar cost averaging during the accumulation phase of your life, you must not when you retire!  Preserving your money and distributing it takes entirely different methods.  Don’t poke holes in your retirement bucket by going with the advice given to the herd. Contact me for alternative solutions that make sense for the stage of life in which you are currently living:  peter@moneymastery.com.

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