By Boyce F. Lowery, CLU, ChFC
You’ve spent decades working hard and saving diligently. Now you’ve decided to slow down and enjoy the fruits of your labor. It is something that you have been planning for your whole life but now that it’s time, how do you actually do it?
What Is Decumulation?
While you are working, saving, and investing, you are said to be in the accumulation phase of life—because you are accumulating wealth. When the time comes to reverse the process and start spending down your savings, that is called decumulation. Usually this happens during the retirement years.
How Do You Prepare for Decumulation?
Switching from accumulation to decumulation is not quite as easy as packing up your desk and showing up at your retirement party. There is much more to it. The first thing you have to do is change your mindset, which is much harder than it sounds. You have spent your entire adult life accumulating wealth for the future, and now you have to do a complete reversal and start spending that money that you worked so hard to save. Making that mental shift is very difficult for many people, so the sooner you begin to prepare for it, the better.
Another thing you must do to prepare is to develop an accurate picture of your spending habits. Having a budget that accurately reflects your expenses is foundational to preparing for decumulation. Instead of your employer sending you a paycheck, you will have to be the one to decide how much money to withdraw on a regular basis. In order to accurately plan for that, you need a solid understanding of how much you currently spend and how that will adjust in retirement.
Your final step is preparing a plan for decumulation. If you want to maximize your lifestyle in retirement or leave a legacy for your family, then you need to be very strategic. Here are some things to take into consideration as you develop a decumulation plan.
Important Decumulation Considerations
One of the biggest threats to your wealth that you will face in retirement is taxes. When developing a tax-efficient plan, you need to consider the tax status of the different accounts that you have to draw from in addition to the growth potential of the different assets that you own. When you take withdrawals, and where you take them from, will play a major role in the amount of taxes you end up paying. What you do with the money also matters. If you are charitably inclined, you can take advantage of qualified charitable distributions to limit your tax liability while meeting your required minimum distributions from any qualified retirement accounts.
Guard Against the Longevity Risk
Longevity is another threat that many retirees face. With increased life spans, retirement can last over 30 years. The fear of running out of money is a major concern for half of Americans. (1) One way to protect against this is to maintain equity investments for some growth even after retirement. Another option is to purchase an annuity that will provide a guaranteed lifetime income.
Maximize Retirement Benefits
While there are fewer options for claiming strategies than there were in the past, when you choose to claim your Social Security retirement benefits is a very important part of the decumulation puzzle. Waiting until age 70 maximizes the monthly benefit, but your life expectancy will impact whether or not that is a good strategy for you to pursue. If you have a pension plan, you may also have choices to make regarding taking a lump sum or an annuity with or without survivor benefits.
Most of the tips so far have been more about offensive moves, but it is important to maintain a strong defense during decumulation as well. There are a number of risks that you will have to be prepared for. Inflation, or the decrease in purchasing power of your money, is one of them. If your retirement lasts 30 years, the amount of monthly cash flow that you will need to live on could increase significantly over that time period as prices rise. Another risk is market risk. As we have seen lately, growth in the markets is not guaranteed and large losses can be very detrimental to your ability to retire comfortably.
As you can see, there is a lot that needs to be taken into consideration when planning for decumulation. Thus, it can be helpful to work with an experienced financial professional who can help you plan as you near the decumulation stage. If you don’t already have the right financial professional on your team, call us at 888-827-0146 for a free and confidential consultation.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.