Utilizing a Retirement Decumulation Strategy

Published August 2, 2017
It’s just as important to have a plan for spending money as it is for saving it. Here’s what you need to know.
  • Decumulation is the opposite of accumulation and refers to how and when one spends their wealth during retirement
  • It’s important to consider how your assets are currently invested and your ability to withdraw from those accounts
  • Be sure to estimate your spending during your retirement so you know what assets can remain invested

Decumulation, also referred to as de-accumulation, is the process of deploying your savings to fund your lifestyle in retirement. It’s essentially the opposite of accumulation, or the process of building wealth during your working years. How you decide to decumulate your assets is the most important decision you’ll make as you approach retirement. By estimating how and when you will need to spend during your retirement, you can be sure to meet your spending needs.

When deciding how to decumulate your assets, be sure to consider the three following things:

1. How are your assets invested?

Safer investments mean lower expected returns but more protection. Riskier investments could produce higher returns, but puts your principal at risk. You’ll want to think about what portion of your money you need access to in the next few years versus what can remain invested for a long time.

2. How will you withdraw from your accounts?

With a systematic withdrawal plan, you could set up set dollar or percentage amount withdrawals from your portfolio. The government’s methodology, known as required minimum distributions (RMDs), has you draw down your IRA based on life expectancies. Either way, you must consider which of your investments are being liquidated to fund the withdrawal and how market upturns and downturns could impact your plan.

3. What is your balance between guaranteed income sources and liquid assets?

For nearly everyone, an optimal retirement portfolio includes both. If your Social Security and any existing pension benefits do not cover your basic expenses, you could cover the gap by converting some of your assets into a steady retirement paycheck that continues for life (as with the Personal Pension or an income annuity). Consider the tradeoff between liquidity and the certainty of income you can’t outlive.

Nimish Shukla

Nimish Shukla

Financial Planning Professional

Nimish has spoken with thousands of customers about retirement spending. As a CFA Charterholder and licensed fixed annuity producer he values the importance of building an income stream for retirement. In addition to his work at Blueprint Income he is also a regular contributor to Nerdwallet.