Dollar-cost averaging and retirement

Planning retirement: dollar-cost averaging

The stock market is unpredictable, making investing a tricky endeavor. You can get around some of the uncertainty by using dollar-cost averaging when investing.

What is dollar-cost averaging?

Dollar-cost averaging is investing a particular amount of money on a regular schedule over the long term, regardless of how the market is doing. Your shares are cheap in a down market and more expensive in an up market. When planning retirement, this is a useful tool that can help you meet your retirement goals.

How it works

Let's say that you plan to invest $100 a month for three months. The first month shares of ABC fund cost $10 each, so you get 10 shares. Then shares double the second month to $20 per share, so you get five shares. The third month shares are at $25, so you get four shares. At the end of three months, you have 19 shares for a total investment of $300. Because shares are now trading at $25, you have a profit of $175, a figure arrived at by multiplying 19 by $25 and subtracting your $300 investment. Your average cost for fund shares was about $16.

Of course, in reality, fund shares are not likely to rise that quickly in such a short time span. But as you can see, dollar-cost averaging typically nets more reliable yields than you would see if you dropped a lot of money in the market all at once. With a lump sum, you could lose a large portion of your money if the market headed south shortly after you invested.

Where to use it

Dollar-cost averaging is commonly used among those who are planning retirement by investing regularly in tax-favorable retirement vehicles. One example of this would be to have money directed from a savings account to an IRA each month. The same is true with a company retirement plan. Generally, you can elect to have a set amount automatically deducted from your paycheck and contributed to funds in your 401(k) plan.

Check out Bankrate's retirement calculators and tools for help with planning.

News alert Create a news alert for "retirement"


Show Bankrate's community sharing policy
          Connect with us
Product Rate Change Last week
30 year fixed 4.23%  0.02 4.25%
15 year fixed 3.23%  0.02 3.21%
5/1 ARM 3.45%  0.11 3.56%
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.36%  0.01 4.35%
50K FICO-based HELOC 4.06% --0.00 4.06%
100K FICO-based HELOC 3.91% --0.00 3.91%
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.79%  0.10 2.69%
48 month used car loan 2.98%  0.06 2.92%
60 month new car loan 3.23%  0.05 3.18%
View Rates in your area Next
Product Rate Change Last week
1 Year CD 0.94%  0.03 0.91%
2 Year CD 1.13%  0.03 1.10%
5 Year CD 1.76% --0.01 1.77%
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.71%  0.01 15.70%
Cash Back Cards 16.41%  0.01 16.40%
Low Interest Cards 10.86% --0.00 10.86%

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.


Jennie Phipps

Save taxes — start a business

Becoming an entrepreneur is a tax-friendly way for retirees to make and save money.  ... Read more

Partner Center

Connect with us