Reverse $ Cost Averaging

Reverse Dollar Cost Averaging

Studies have shown that the greatest fear for people in their retirement years is the fear of out living their retirement savings. This makes it imperative to understand the risk of reverse dollar cost averaging.

There is a very common investment strategy promoted by many well meaning risk based financial sales people called Dollar Cost Averaging.

The concept encourages the investor to invest the same dollar amount each month regardless of whether prices are high or low. When prices are high, the investor buys fewer shares. When prices are low, the investor buys more shares. If the stock market grows over time, and if the investor retires at a market high, the average share price might be lower than if the investor tried to time the market and invest 100% of their money all at once. Of course, this strategy is not a guarantee of positive results, even though virtually every piece of sales literature shows this strategy to be effective.

What’s truly tragic is that the risk of the other side of this coin is rarely if ever discussed by risk based financial sales people who promote Dollar Cost Averaging.

When an investor sells the same dollar amount of their retirement account each month regardless of whether prices are high or low to produce consistant retirement income, they are selling fewer shares when prices are high and more shares when prices are low.

Reverse Dollar Cost Averaging can actually increase the risk of outliving your retirement savings. This risk is amplified during a bear market when prices are low for longer periods of time. If your retirement income is exposed to  unnecessary risk, the results can be irreparable.

Fortunately, there are strategies and financial products designed to insure that you don’t outlive your retirement savings. These strategies and products can provide lifetime income benefits for both you and your spouse.