What Is a Retirement Decumulation Strategy & Why You Need To Develop One

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It doesn’t take a genius to understand the importance of saving for retirement.

Most retirees live on a fixed income, meaning they rely on limited funds to cover their living expenses (generally Social Security and retirement savings) since they are no longer getting a paycheck from working. All other things being equal, the higher your retirement savings balance, the more money you have to spend.

The process of how and when to spend that money is referred to as “decumulation.” This is something you need to plan for carefully to make certain you’ll be financially secure for the full length of your retirement. 

A number of factors play a role in your retirement decumulation strategy, including the size of your retirement fund, your health situation, when you plan to start taking Social Security, and whether you plan to earn additional income in retirement. Here are some questions to consider when formulating a decumulation strategy.

When Will You Apply for Social Security?

You can apply for Social Security retirement benefits as early as age 62 or as late as age 70. The longer you wait, the bigger your monthly check will be.

Waiting won’t just maximize your Social Security payment. Because your monthly income will be higher, you’ll be able to extend the life of your personal retirement savings by not having to withdraw as much.

Are You Retirement Ready?

Conversely, since collecting Social Security earlier lowers your monthly benefit payment, you might have to draw more out of your retirement savings every month.

When Are You Going To Stop Working? 

The answer to this question will largely depend on how much you expect to have saved at retirement.

Delaying your retirement to keep working means you’ll have more time to build up your retirement savings fund, which will give you a bigger nest egg when you begin decumulating.

However, if you leave the workforce earlier — say at age 62, when you can first begin to collect Social Security — your retirement fund won’t be growing any further, meaning you may have to adopt a more conservative decumulation strategy.

How Long Do You Expect To Live?

It may be a little morbid, but how many years you have left is an important consideration for retirement planning.

If you are in excellent health when you retire, then you’ll need to be more conservative with your decumulation strategy because you might live another 30 years or more. This means budgeting a lower retirement savings withdrawal each month.

On the other hand, if you are in poor health or have reason to believe you won’t have a long life after retirement, you might be able to withdraw more each month than someone who is in excellent health.

For example, if you follow the common 4% rule of withdrawing 4% of your total savings each year, adjusted for inflation, you can expect those savings to last at least 30 years. If you only need it to last for 15, you can withdraw significantly more than 4%.

Are You Retirement Ready?

What Is Your Risk Tolerance?

This applies to your investment strategy as well as your confidence in how long your retirement savings will last.

If you have a high-risk, high-reward investment strategy focused on stocks and growth funds, you are betting that your retirement savings will grow quickly. But if you’re close to retirement, or already retired, the higher volatility of these sorts of investments could put your savings at risk.

If you take a more conservative approach, you are probably expecting slow and steady growth. When you’re at or near retirement, this will provide stability and peace of mind, but if you have a long-time horizon, you may be leaving money on the table long-term.

Having a low risk of outliving your savings typically means you can withdraw more from your retirement savings each month. However, if you believe there is a high risk of outliving your savings, then you should plan to withdraw less.

Remember, if you’re unsure of how to plan, it never hurts to speak to a professional about the best ways to manage your finances. A little bit of planning now will go a long way to making sure you can afford a comfortable retirement.

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Vance Cariaga contributed to the reporting for this article.


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