First Person: Considering DRIPs for My Retirement

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Over the years, I have moved from funds that move more with the market's ups and downs into a fund that drips. What's a "DRIP"? DRIP stands for "(D)ividend (R)e(I)nvestment (P)lan. According to a recent article on MSN Money entitled, "Dividend checks every month":

"While you may not realize it, spreading your investments across time is a form of diversification. In a nutshell, dollar-cost averaging says that you should make regular investments over time, regardless of whether the market is "high" or "low."

Making regular investments assures that you will not invest all of your funds at market peaks, as well as guaranteeing you will buy during market low points."

Personally, I keep the 401(k) plan from my previous employer in a relatively stable income fund. While this fund still tends to rise and fall with the stock market as it ebbs and flows, it also pays out a very stable monthly dividend. I like this aspect of the fund for several reasons, and while the fund as a whole doesn't accumulate the huge gains of some of the riskier market-based options out there, I'm pretty satisfied with it as a whole.

Reinvestment Option

Even before retirement, getting dividends that reinvest themselves is a great thing. I particularly like this aspect of dividends -- and chose a fund that pays such funds monthly because of this -- because it allows my investment to grow outside of what the stock market does. Even if the stock market goes down, I still get my monthly dividend. While the dividend amount might not be quite as high when the market's down, it's there nonetheless. And since it is reinvested back into the account rather than paid out, and since my dividend amount is based upon the number of shares I hold, I push my dividend amount a little bit higher each month, growing my investment -- tax free until I start withdrawing funds I might add -- without having to lift a finger.

Retirement Plan Contribution

As self-employed person, I obviously don't have an employer-sponsored retirement plan. With margins razor thin, I have trouble squeezing out anything extra for putting into the stock market, and this is where a dividend paying income fund such as I have from my previous employer's 401(k) comes in handy. It's actually kind of like I'm funding this account even though I'm not putting any extra money into it. In essence, since I'm not drawing down the balance and I'm having the dividends reinvested, it's like I'm contributing to a retirement plan without dropping a dollar of my current income into the account.

An Eventual Monthly Paycheck…or not

So while my dividends aren't being paid out in cash form right now, eventually they will be. And they could come at a time when a regular paycheck is critical…retirement. Having a regular amount upon which I can depend can provide some financial stability when the security of a regular paycheck may be gone. Paired with regular Social Security benefits, I might be able to utilize such sources as retirement income to allow me to keep from drawing upon other investments or investment principal. And if I don't need my dividends right away, I could possibly defer them a while longer in retirement, allowing them to continue to be reinvested and grow even more.

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Disclaimer:

The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.

Sources:

Carlson, Chuck. MSN Money. "Dividend checks every month". March 8, 2013. http://money.msn.com/top-stocks/post.aspx?post=b0855c7f-72a6-4158-b048-de10b6f82df0. March 14, 2013.

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