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Old 08-11-2014, 05:42 AM
 
Location: Central Massachusetts
4,800 posts, read 4,873,684 times
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Dollar-cost averaging as retirement commences - Lowell Sun Online



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Here's an example: All during the time you have been accumulating your nest egg, you have probably, at the behest of whomever is guiding you, been employing a technique called "dollar-cost averaging." This is a method of investing whereby you purchase the same dollar amount of a mutual fund or other security on a regular and frequent basis, for example every week or every month. The notion is that since you will purchase some shares at lower prices and some at higher prices, you will, on average, be able to accumulate more wealth than if you invested sporadically or in an attempt to "time" the market. Dollar-cost averaging has proven to be a very effective strategy.


When you are spending your money, however, this strategy that worked so well before can be the kiss of death. Imagine that you have $300,000 saved and you want to take $1,000 per month from your savings (the classic "4 Percent Rule"). Also assume that your portfolio is comprised of 30,000 shares, each priced at $10. That means you would have to sell 1,200 shares a year, or 100 per month.

Now assume we have a decade like the 2000s where you have two market drops of over 40 percent in a single 10-year period. Each time the market plummets, the number of shares you must sell to live on goes up, and when the market inevitably recovers you don't have the shares needed to recover.

This concept was brought into specific relief in January 2011, when T. Rowe Price released a study of how the 4 Percent Rule would have held up during the 2000s, using a technique called "Monte Carlo Planning." This is a method of planning whereby a sophisticated "what-if" analysis is used to try to predict how much money you can spend from your savings without running out.

Prior to 2000, it was thought that one could safely spend 4 percent of their income with a 3 percent annual inflation adjustment, and have an 85 percent to 90 percent chance of not depleting their fund over a 30-year period. Monte Carlo simulations routinely held this to be true.

The T. Rowe Price study, however, blew this theory to smithereens. It found that without adjustment, the typical 4 percent withdrawal plan would have had a meager 6 percent -- that's right, 6 percent -- chance of success (i.e., not running out of money).
Of course it is not doom and gloom. The writer of the article suggests adjusting spending by 25% to account for that. Though not a perfect solution it is one. Another is finding another souce of income. Yes hard to do but not impossible. Be creative and if you need help do not be afraid to ask.
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