What Is A Retirement Decumulation Strategy & Why You Need to Develop One

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It doesn’t take a financial whiz to understand the importance of saving for retirement. A retirement fund such as a 401(k) essentially serves as a personal bank that you tap into to cover bills and other expenses when you no longer have a steady paycheck rolling in. The higher your retirement savings balance, the more money you have to spend.

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The process of spending that money — and when — is referred to as “decumulation.” This is something you need to plan for carefully to ensure you don’t run out of personal funds while you are retired.

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 things to consider when formulating a decumulation strategy.

  • Retirement age: 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 as long as you can not only maximize your Social Security payment, it also frees up more money in your retirement fund. In contrast, collecting Social Security early lowers your monthly benefit payment, which means you might have to draw less out of your retirement savings every month.
  • How long you decide to work: Delaying retirement to continue 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 early — say at age 62, when you decide to collect Social Security — your retirement fund is capped for life, meaning you’ll have to adopt a conservative decumulation strategy.
  • Life expectancy: 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 about 25% more each month than someone who is in excellent health, Shlomo Benartzi, a professor of behavioral decision making at UCLA’s Anderson School of Management, told the Arizona Republic.
  • 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. If you take a more conservative approach heavily weighted toward savings accounts and value funds, you are probably eyeing slow and steady retirement fund growth. 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.
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If you’re unsure of how to plan, it never hurts to speak to a financial adviser for the best ways to manage your finances.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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