Which Investing Technique Can Get Me More More: Lump Sum or Dollar Cost Averaging (DCA)?

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A Money Girl listener named Eric says, “I really appreciate listening to your show and all the great information you give. I have a question regarding contributions to my Roth IRA. Some argue it’s best to make equal monthly contributions to take advantage of dollar-cost averaging. Does it make a difference whether I contribute to my Roth IRA monthly or do one lump contribution yearly when I have the money to max out the account?”

Thanks for your great question, Eric! This post will answer it by reviewing what dollar-cost averaging (DCA) is, its pros and cons, and how it compares to investing a lump sum.


What is dollar-cost averaging (DCA)?

As Eric mentioned, dollar-cost averaging is investing a consistent amount at regular intervals, such as monthly or bi-monthly. It’s most commonly used for relatively volatile investments, like index, mutual, and exchange-traded funds (ETFs), where the price could be vastly different every time you intend to buy more shares. 

If you’re enrolled in a workplace retirement plan, such as a 401(k) or 403(b), and have a flat amount or percentage of your paycheck getting contributed, you’re already dollar-cost averaging. 

But what if you’re like Eric and have extra cash to invest in an individual retirement account (IRA), a self-employed retirement plan, or a brokerage? You can invest all of it at once or gradually by dollar-cost averaging.


Example of dollar-cost averaging (DCA)

For instance, let’s say you want to max out an IRA for 2024. You can contribute $7,000 or $8,000 over 50, and you have until April 15, 2025, to do it. 

If you’re under 50 and have $7,000, you could go ahead and contribute all of it, just like Eric is considering. However, perhaps you don’t want to risk investing it at once. 

Instead, you could invest a steady amount, like $583 monthly. 

Let’s say your investment is a mutual fund trading at $10 a share. By purchasing $583 of the fund, you’d buy about 58 shares. But if the fund increases to $12 the following month, you’d buy 48 shares. And if the price falls to $8 the next month, you’d get 73 shares. 


What are the benefits of dollar-cost averaging (DCA)?

By sticking to a DCA strategy over the long term, you may cut the risk of market volatility. It helps smooth out how market fluctuations affect your investment portfolio, making you less vulnerable to bad market timing. In other words, if you invest a lump sum when a fund’s price is at an all-time high, you’d lose money and never have the chance to recover.

Plus, DCA can be easier on your budget if you typically don’t have excess cash to spend. It can also make investing less emotional if you’re more focused on how much to invest rather than on the price of an investment from week to week or month to month. 

Once you choose an investment, it doesn’t matter what its price is because you regularly buy it, whether up or down.

I also like how a DCA strategy allows you to automate investing, keeping you on a predetermined schedule. That’s a great way to make investing a habit you will likely continue, even when an investment’s value drops. Instead, when a price falls, you see it as a chance to buy more shares. 

In general, dollar-cost averaging is best for investors with a long time horizon who don’t don’t have a large lump sum to invest or want to worry about timing the market correctly, which is virtually impossible. You don’t need any experience or expertise to implement a DCA investment strategy. 


What are the downsides of dollar-cost averaging (DCA)?

The downside of DCA is that you could miss out on a huge increase in an investment’s price compared to making a lump sum investment. Also, since the market generally rises over time, you could argue that investing a large amount earlier is better than investing smaller amounts over a long period. 

In general, when the stock market is flat or declines, you’ll likely come out ahead with a DCA strategy. However, when the market goes up, DCA could be a disadvantage. Also, DCA doesn’t remove all investing risk; you must still identify suitable investments based on your risk tolerance, time horizon, and financial goals. 

When should you make a lump sum investment?

Let’s get back to Eric’s question about whether he should make a lump sum Roth IRA contribution and max it out now. Eric, since the amount you plan to invest is relatively small and the market is generally doing well right now, I would max out your IRA with a lump sum contribution. 

However, I’d favor a DCA strategy if you had just won the lottery and had tens or hundreds of thousands to invest. Knowing that you’ve maxed out your account can give you peace of mind that you’ve accomplished a significant financial goal. Also, investing the $7,000 now could prevent you from spending the money on something else.


This article originally appeared on Quickanddirtytips.com and was syndicated by MediaFeed.org.

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How Much it Really Costs to Retire in Every State

How Much it Really Costs to Retire in Every State

Where you live in retirement can have a big impact on your annual expenses. While the average annual cost of living in the U.S. is $51,624, that figure can fluctuate significantly — from nearly double that amount in the most expensive state to just under 90 percent in the least expensive. Consider the average retirement age in each state and your life expectancy, and you’re looking at a sizable amount of money needed to cover your retirement years.

Of course, Social Security can help cover those expenses, but knowing when you’re eligible to take those benefits and how to maximize them when you do can help to ensure your financial comfort. Likewise, knowing how states tax Social Security benefits can help you decide which states are the most financially attractive. As you think about moving or potentially downsizing in retirement, you need to weight how much it costs to retire by location. 

Deposit Photos

To put this list together, we looked at data compiled by HowMuch.net, based on figures from the Bureau of Labor Statistics along with cost of living and life expectancy data. 

The yearly figure needed for retirement comes from the BLS’ 2018 Consumer Expenditure Survey. The expenditures HowMuch considered were those of the age group “65 years or more.”

To obtain the total amount required for a comfortable retirement, HowMuch used IHME-based life expectancy figures published by National Geographic. They then subtracted the average retirement year published on MoneyTalks to the previous figure and multiplied it by the state-adjusted yearly expenditures, to obtain the total amount required to retire.

DepositPhotos.com

According to the data, the average American retirement age is 64 and the average life expectancy is 78.6 years, meaning retirees need an average of $904,000 to cover their living expenses in retirement. 

Here’s a look at the data in every state, including the average retirement age, cost of living, annual expenses, life expectancy and total amount needed to cover retirement costs. We’ve ranked it from least to most expensive.

Rawpixel/istockphoto

Average retirement age: 63 

Cost of living index: 0.86  

Average annual expenses: $44,758

Life expectancy: 74.5

Retirement funds needed: $617,661

DepositPhotos.com

Average retirement age: 64 

Cost of living index: 0.89  

Average annual expenses: $45,894

Life expectancy: 76

Retirement funds needed: $660,870

istockphoto

Average retirement age: 62  

Cost of living index: 0.89

Average annual expenses: $46,049

Life expectancy: 75

Retirement funds needed: $712,832

istockphoto

Average retirement age: 62 

Cost of living index: 0.87  

Average annual expenses: $45,016

Life expectancy: 75.4

Retirement funds needed: $723,859

DepositPhotos.com

Average retirement age: 62  

Cost of living index: 0.88   

Average annual expenses: $45,274  

Life expectancy: 75.4

Retirement funds needed: $728,010

DepositPhotos.com

Average retirement age: 65 

Cost of living index: 0.90  

Average annual expenses: $46,255

Life expectancy: 78.2

Retirement funds needed: $732,681

istockphoto

Average retirement age: 66 

Cost of living index: 0.98

Average annual expenses: 78.1

Life expectancy: 78.1

Retirement funds needed: $738,337

RiverNorthPhotography

Average retirement age: 62 

Cost of living index: 0.92  

Average annual expenses: $47,339

Life expectancy: 75

Retirement funds needed: $738,492

Covington, Kentucky by EEJCC (CC BY)

Average retirement age: 65 

Cost of living index: 0.91  

Average annual expenses: $47,236

Life expectancy: 78.5

Retirement funds needed: $765,223

f11photo/istockphoto

Average retirement age: 63 

Cost of living index: 0.88  

Average annual expenses:  $45,584

Life expectancy: 77.1

Retirement funds needed: $771,281

eyecrave

Average retirement age: 63 

Cost of living index: 0.92  

Average annual expenses: $47,597

Life expectancy: 76.6

Retirement funds needed: $776,788

istockphoto

Average retirement age: 62 

Cost of living index: 0.94  

Average annual expenses: $48,320

Life expectancy: 75.4

Retirement funds needed: $776,987

istockphoto

Average retirement age: 63 

Cost of living index: 0.96  

Average annual expenses: $49,507

Life expectancy: 76.2

Retirement funds needed: $784,197

SeanPavonePhoto

Average retirement age: 63 

Cost of living index: 0.91  

Average annual expenses: $46,720

Life expectancy: 77

Retirement funds needed: $784,891

DepositPhotos.com

Average retirement age: 61 

Cost of living index: 0.92  

Average annual expenses: $47,546

Life expectancy: 74.8

Retirement funds needed: $787,357

DepositPhotos.com

Average retirement age: 63 

Cost of living index: 0.91  

Average annual expenses: $46,771

Life expectancy: 77.2

Retirement funds needed: $796,984

istockphoto

Average retirement age: 65 

Cost of living index: 0.92  

Average annual expenses: $47,649

Life expectancy: 79.1

Retirement funds needed: $806,220

nameinfame

Average retirement age: 65  

Cost of living index: 0.92  

Average annual expenses: $47,494

Life expectancy: 79.4

Retirement funds needed: $820,698

JoeChristensen

Average retirement age: 65 

Cost of living index: 0.98  

Average annual expenses: $50,850

Life expectancy: 78.5

Retirement funds needed: $823,764

DenisTangneyJr/istockphoto

Average retirement age: 64 

Cost of living index: 0.96  

Average annual expenses: $49,404

Life expectancy: 77.9

Retirement funds needed: $824,062

AnujSahaiPhotography

Average retirement age: 64 

Cost of living index: 1.05  

Average annual expenses: $54,205

Life expectancy: 76.9

Retirement funds needed: $839,096

istockphoto

Average retirement age: 64 

Cost of living index: 0.99  

Average annual expenses: $51,005

Life expectancy: 78

Retirement funds needed: $856,876

DepositPhotos.com

Average retirement age: 62 

Cost of living index: 0.89  

Average annual expenses: $46,203

Life expectancy: 77.6

Retirement funds needed: $864,929

haveseen

Average retirement age: 63 

Cost of living index: 0.94  

Average annual expenses: $48,733

Life expectancy: 77.8

Retirement funds needed: $865,499

Sean Pavone / istockphoto

Average retirement age: 64 

Cost of living index: 0.94  

Average annual expenses: $58108

Life expectancy: 79

Retirement funds needed: $871,620

DepositPhotos.com

Average retirement age: 65 

Cost of living index: 0.98  

Average annual expenses: $50,850

Life expectancy: 79.3

Retirement funds needed: $872,580

InSapphoWeTrust

Average retirement age: 64 

Cost of living index: 0.95  

Average annual expenses: $49,043 

Life expectancy: 79

Retirement funds needed: $882,770

Pixabay.com

Average retirement age: 62 

Cost of living index: 0.91  

Average annual expenses: $47,184

Life expectancy: 77.6

Retirement funds needed: $883,291

Davel5957

Average retirement age: 65 

Cost of living index: 1.01

Average annual expenses: $52,295

Life expectancy: 79.1  

Retirement funds needed: $884,833

Sherry Smith

Average retirement age: 64 

Cost of living index: 0.96  

Average annual expenses: $49,714

Life expectancy: 79.5

Retirement funds needed: $924,679

Pixabay.com

Average retirement age: 64 

Cost of living index: 0.99  

Average annual expenses: $51,159

Life expectancy: 79.1

Retirement funds needed: $927,008

Getty

Average retirement age: 65

Cost of living index: 1.08  

Average annual expenses: $55,960

Life expectancy: 79.1

Retirement funds needed: $946,850

Pixabay.com

Average retirement age: 65

Cost of living index: 1.06   

Average annual expenses: $54,670 

Life expectancy: 79.9

Retirement funds needed: $977,496

istockphoto

Average retirement age: 65 

Cost of living index: 1.02  

Average annual expenses: $52,605

Life expectancy: 80.7

Retirement funds needed: $991,075

Scruggelgreen

Average retirement age: 63 

Cost of living index: 1.01  

Average annual expenses: $52,140 

Life expectancy:  79.1

Retirement funds needed: $1.01 million

Elzbieta Sekowska/shutterstock

Average retirement age: 63

Cost of living index: 1.07  

Average annual expenses: $55,289

Life expectancy: 78.2

Retirement funds needed: $1.01 million

DepositPhotos.com

Average retirement age: 63

Cost of living index: 1.09  

Average annual expenses: $56,373

Life expectancy: 77.9

Retirement funds needed: $1.01 million

Pixabay.com

Average retirement age: 67 

Cost of living index: 1.62  

Average annual expenses: $83,683

Life expectancy: 77.1

Retirement funds needed: $1.01 million

Sean Pavone

Average retirement age: 65 

Cost of living index: 1.21  

Average annual expenses: $62,413

Life expectancy: 79.3

Retirement funds needed: $1.07 million

randydellinger/istockphoto

Average retirement age: 64 

Cost of living index: 1.10  

Average annual expenses: $56,890

Life expectancy: 79.9

Retirement funds needed: $1.08 million

4nadia

Average retirement age: 65 

Cost of living index: 1.17  

Average annual expenses: $60,348

Life expectancy: 79.9

Retirement funds needed: $1.08 million

” DonLand”

Average retirement age: 63 

Cost of living index: 1.17  

Average annual expenses: $60,555

Life expectancy: 78

Retirement funds needed: $1.09 million

istockphoto

Average retirement age: 65 

Cost of living index: 1.30  

Average annual expenses: $67,214

Life expectancy: 78.8

Retirement funds needed: $1.11 million

Pixabay.com

Average retirement age: 66 

Cost of living index: 1.34  

Average annual expenses: $69,279

Life expectancy: 79.9

Retirement funds needed: $1.15 million

Pixabay.com

Average retirement age: 65 

Cost of living index: 1.25  

Average annual expenses: $64,736

Life expectancy: 80.5

Retirement funds needed: $1.20 million

aimintang

Average retirement age: 65 

Cost of living index: 1.29

Average annual expenses: $79,852

Life expectancy: 80

Retirement funds needed: $1.25 million

concoll.edu

Average retirement age:  61

Cost of living index: 1.29

Average annual expenses: $66,956

Life expectancy: 77.7

Retirement funds needed: $1.34 million

DepositPhotos.com

Average retirement age: 63 

Cost of living index: 1.33  

Average annual expenses: $68,712

Life expectancy: 79.2

Retirement funds needed: $1.36 million

DepositPhotos.com

Average retirement age: 64 

Cost of living index: 1.35  

Average annual expenses: $69,847

Life expectancy: 80.8

Retirement funds needed: $1.41 million

Eloi_Omella

Average retirement age: 64  

Cost of living index: 1.39   

Average annual expenses: $86,171

Life expectancy: 80.9

Retirement funds needed: $1.45 million

istockphoto

Average retirement age: 66

Cost of living index: 1.92  

Average annual expenses: $119,004

Life expectancy: 81.5

Retirement funds needed: $1.84 million

This article originally appeared on SimplyWise and was syndicated by MediaFeed.

Pawel Gual

Featured Image Credit: oatawa/istockphoto.

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