How to use DRIP Plans to Build for Retirement

A common challenge for most investors is finding a reliable strategy to build for retirement. The main reason is from most people becoming caught up in the emotional swings that can occur in the markets. This is when they will often make decisions to buy or sell (which could have negative implications on their retirement accounts). However, despite these issues there is one strategy that can help an individual to build for retirement called dividend reinvestment plans (DRIPs). To fully understand how this can assist in retirement planning requires looking at the advantages these plans have to offer.

The Benefits of DRIP Plans

There are a number of benefits associated with DRIP plans the most notable include: small upfront investments, no commissions and the ability to use compounding to build wealth. The small upfront investment is through contributing trivial amounts on a consistent basis (i.e. $10.00 per month). This helps anyone, who is serious about building for retirement, to establish a portfolio of stocks over the long term.

A second advantage is there are no commissions.  Whenever any kind of DRIP plan is conducting new purchases, these transactions are placed directly with the company itself. This means that investors do not have to pay any kind of commissions to a broker when making new buys on a scheduled basis. Over the long term, this will help to increase the overall returns in the portfolio.

A third benefit of DRIP plans is the ability to use compounding. This is when investors will make continuous purchases (which will bring down the cost basis).Over the course of time, the value of the investment will increase exponentially through steady increases in the price of the stock. At the same time, any kind of dividends that are received can be automatically reinvested into purchasing additional shares.  For example, suppose that someone invested a total of $2,500.00 for two years. Taking into account an annual return of 10% including growth and dividends, this strategy would realize a gain of $211,010.00 in 40 years. This is significant, because if this approach is followed more than two years (i.e. 10, 20 or 30). The portfolio value could be well over $2 million.

Clearly, planning for retirement can be very challenging for most investors. The biggest reason is they will often become caught up in the emotionalism surrounding the markets. This is when they will make the wrong decisions by purchasing or selling at inappropriate times. Once this takes place, is when they will see an increase in volatility. This will hurt the performance of their portfolio.

To avoid these kinds of challenges requires utilizing an approach that will provide consistent returns without lots of upfront investment capital. The best way to do this is to use DRIP plans. This is because of the advantages these areas are providing to include: small upfront investments, no commissions and the ability to use compounding. The combination of these factors can offer investors a tremendous advantage when it comes to retirement. As a result, these kinds of tools should be used as a way to help supplement retirement savings.

Filed Under: 401Kadvicefinancial educationInvestingRetirementROTH IRATraditional IRA

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  • DRIP’s are great for compounding growth, but the investor must also do their due diligence to be sure they are purchasing shares in companies that will continue to perform well and pay (and raise) dividends consistently over the long haul.  Tax consequences should also be considered, especially if you are going to end up selling partial allotments of your shares in the future.