Most investors are familiar with dollar cost averaging (DCA) which is an accumulation process to invest in a specific manner and a defined framework, but what happens when your advisor wants to transition your portfolio into producing a retirement income.  This is called reverse dollar cost averaging (RDCA).

In a distribution portfolio at retirement, RDCA works when investments are sold to provide a monthly income.  This standard practice guarantees a monthly revenue stream for clients especially when there are no additional employment pensions plans.  The problem is, RDCA has the exact opposite effect on your portfolio.  The cyclical trends that helped build your portfolio, now can cause severe damage when income is taken out.  In fact, if the down turns are deep enough, it can cut your retirement portfolio’s life in half.

Talk to your advisor about RDCA and understand the risks and rewards to this retirement revenue structure.

Christine’s Tip:

During a typical 25 year time horizon, a retiree with an equity portfolio can expect to endure between three to five downward swings to the equity markets.  If income is withdrawn from this fluctuating asset class, the average retiree fill have to further endure a loss of between 25% to 45% of their overall capital portfolio due to RDCA.   This is difficult to deal with as a retiree – so you need to protect your investments with fixed income alternatives or annuity products.