Why Retirement Decumulation Is The New Accumulation
You can be young without money but you can’t be old without it. Tennessee Williams Is Decumulation Even A Word?
Although most of us have been raised to focus on the Accumulation of money, things and experiences over the course of our lives – there’s an increasing shift to focus on Decumulation as our population ages.
Decumulation is actually a word and it refers to the de-accumulation of assets in order to maintain your quality of life in retirement. It’s much more complex than the accumulation of assets. During the accumulation phase of your life you basically need to save and invest efficiently (diversify and keep fees low) over time. That’s it; it’s “simple but not easy” and thankfully it has largely been commoditized by robos and discount brokers. When you are decumulating assets you need to be smart about:
Setting up lifetime income sources life Social Security, pensions and annuities
Positioning and tax efficiently drawing down taxable, tax deferred (401K, IRA) and tax exempt (Roth) assets while managing RMDs (required minimum distributions) against marginal tax rates
Covering health care costs (pre-Medicare and post Medicare) and long term care
Choosing whether and when you should tap other sources of wealth like home equity
Managing risk around things which you have no control over like market returns, inflation and longevity
Efficiently passing on any assets you want to your heirs
Boomers and the Silent Generation Are Going to Decumulate Or Bequeath $80 Trillion Boomers & the Silent Generation control 75% of the $107 Trillion in total household wealth in the United States. For reference this is almost 4 times the current United States GDP (Gross Domestic Product) of $19.4 Trillion per year. There’s a lot at stake and it’s worth it for households to be thoughtful about decumulating efficiently. Federal Reserve wealth levels by generation Federal Reserve If you want to take a deeper dive, last year I did a podcast with Morgan Housel on how the coming wealth transfer will impact Millenials and Gen Z.
Things To Consider When Planning For Decumulation Based on my interviews with several retirement and financial independence experts these are some of the top things to consider:
Get mentally prepared to shift from saving to spending down your assets. It’s psychologically hard for savers to become spenders, so you need to think this through in advance or you’ll run the risk of not enjoying the fruits of all of your hard earned saving and investing.
Document your spending and build a real budget. This is also an opportunity to really imagine what you want your life to look like and get more efficient about your spending.
Simplify your life. Remember when you’ve moved in the past? If you’re like me you got rid of a LOT of stuff. Think of the transition to retirement as an opportunity to KonMari your life and get rid of stuff that “doesn’t spark joy”.
Turn on lifetime income. Be smart about how you claim Social Security and any pensions. The basic rule of thumb for Social Security is that the highest income earner should claim Social Security at 70, so that their spouse gets the maximum survivor benefit.
Set up your investments in a way that makes you confident, reduces market volatility and sequence of returns risk. Many people use a bucket strategy and keep 1-2 years of income in zero risk savings or CDs, then 3-7 years in fixed income solutions and then a longer term bucket with riskier and more volatile investments like equities. This requires that you keep moving money between these buckets.
Set up a plan and process for monitoring your assets, income and risks over time.
Understand your levers:
What must you spend vs. what would you like to spend? Are you willing to live with less travel or eating out if there is a recession?
Are you planning to spend less over time? Did you know that the average retiree spends about 10% less per decade in retirement, so if you retire at 60, then at 90 you are likely spending 30% less in today’s dollars than you were at 60.
Are you willing to go back to work part time? For example if you retirement income need is $75,000 annually you may only need to make $25,000 per year if things really go sideways, since you’ll have Social Security (and perhaps a pension) plus savings.
Are you willing to move?
Are you willing to use debt? For example, would you be willing to use a home equity line of credit or a reverse mortgage to bridge yourself in the event of a downturn?
How much risk do you need to take in your retirement portfolio to achieve your goals?
Planning for decumulation is important and worth discussing with your fiduciary financial advisor. There are also new free retirement planning tools that can help you get started on your own.