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Improved Dollar Cost Averaging
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Retirement personal financial planning software reverses dollar cost averaging to calculate each periodic withdrawal amount from an IRA or 401K retirement plan to obtain more (not less) than the average price. The SACOUT® formula requires the following user inputs: When a withdrawal is to be made the only input required is the current price p, just as in dollar cost averaging. The following inputs are made only when the program is started: A is the nominal dollar amount to be sold each period. The actual dollar amount sold will vary, being larger when the price p is higher and smaller when p is low. More on this later. Pb is a base price, either today's price or what you think the average price will be over the selling period. When the price p equals Pb you will sell the nominal dollar amount, A. Ko is a gain factor which establishes a new baseline above the security price at KoPb dollars. This is the way dollar cost averaging is reversed. Instead of measuring up from zero to determine the number of shares to buy, we measure down from KoPb to determine the number of shares to sell. Making Ko=2 measures down from two times Pb and produces essentially the same results as dollar cost averaging, only in reverse. Making Ko less, for example 1.5, measures down from 1.5 times Pb so price variations look bigger to the formula and a higher average price results. The negative side of Ko lower than 2 is that your dollar amount sold will vary more with price. A lower Ko would be appropriate for a low volatility investment. Making Ko large, for example 50, will sell an equal number of shares each period to obtain an average selling price nearly equal to the average price over time. This is better than selling an equal dollar amount per period. The program has a built in default value of 1.5. If an investment such as an annuity has various funds or no unit price, then assume an initial unit price, (i.e. $10) and divide the value by this to determine the unit price. After that find p by dividing the value by the number of units owned. When trades are made, adjust units owned by units traded (trade dollars divided by unit value at trade time). The SACOUT® method will sell a variable dollar amount per period. After all, if you were to sell a fixed dollar amount per period as is now the state of the art, selecting the dollar amount to be sold is a rather arbitrary decision. If the price increases more than expected, The SACOUT® method will reach a given total dollar sales sooner than expected. One then has the option to stop. If the price falls the SACOUT® method will sell less than expected and can be continued. Hopefully you will be monitoring the performance and can make adjustments to A, or Pb before that happens. SACOUT® automatically increases the withdrawal when the value of the investment is up, and decreases it when the value is down. This can be desirable as it is natural to adjust spending as the value of investments change. The Microsoft windows software for both Sacout and Sacin is supplied on a CD ROM that requires as a minimum: Windows 95, 486 CPU, 32 MB RAM, and 5MB available hard disk space. Sacco Company, Inc.
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