Page 115 - Ready Set Retire
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Ready. Set. Retire!
And it works a bit when saving. What they won’t tell you is that
it works even better when spending...but in reverse! Hence the
name, “Reverse Dollar Cost Averaging.”
Here’s a simple illustration. Imagine you have $500,000
comprising 10,000 shares at $50 each. And assume you will be
taking 4% per year, or $20,000 in income. Translated into
shares, that means you will be selling 400 shares a year. If you
are doing the math, 400 shares a year times 30 is 12,000 shares,
so we are already short by 2,000 shares. But no worries, your
risky planner tells you, you will get gains of 8% a year! (If he’s
so confident, why can’t you take 8% a year?)
So armed with this wisdom of the ages you elect to retire in the
year 2000. That year you sell 400 shares, just as planned. Next
year the market goes down by 2.1%, so to receive the original
$20,000, you must sell 408.33 shares. But you also budgeted
for a 3% COLA, which means you must sell 420.58 shares.
Each year you must sell more shares just to keep up. Below is
a chart showing 4% a year beginning 1/1/2000:
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