From Saver to Spender: Mastering the Art of Decumulation
7 minute read time.
Are you retired, and afraid to spend your savings? If so, you’re far from alone. New research from the Alliance for Lifetime Income’s 2024 Protected Retirement Income and Planning (PRIP) Study shows that 46% of American retirees say spending creates anxiety and is taking an emotional toll.
Retirement, for the most part, is supposed to be about enjoying life and doing things you didn’t have the time to do during your working years. So, how can you move past the fear of outliving your savings, to get to the retirement you’ve dreamed of? It comes down to mastering the art of what’s known as “decumulation.”
WHAT IS DECUMULATION, EXACTLY?
It’s a true mouthful. But the word “decumulation,” essentially just means spending down the assets you’ve built up during your working years in a way that best supports your lifestyle in retirement — and hopefully without running short. With over 4.1 million Americans turning 65 each year through 2027, more people are exiting the workforce than ever before – meaning an increasing number of people are going to need to focus on crafting a decumulation plan that works for them.
The problem though, is many aren’t. ALI research shows that not having a clear plan for drawing down savings and knowing how to generate income in retirement are major contributing factors to people’s anxiety. Alarmingly, fewer than a third of those who participated in ALI’s recent survey said they have a specific income plan in place for retirement. 41% said they don’t know how to stage withdrawals from their accounts. And, less than half (49%) said they were confident in how to handle required minimum distributions or how to minimize their tax burden, both of which are key components when it comes to retirement planning.
Many of us spend decades saving for retirement. But what happens when it’s time to spend those hard-earned dollars…how do you make them last? In the next episode of “Your Money Map,” we’ll talk with Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar and author of “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement” and David Blanchett, a Research Fellow in the Alliance for Lifetime Income Institute and Managing Director, Portfolio Manager and Head of Retirement Research for PGIM DC Solutions, about the art of decumulation, or in other words, mastering how to turn your nest egg into sustainable income.
ALLEVIATING ANXIETY WITH A “LICENSE TO SPEND”
If you’re barreling toward retirement without a plan in place, or worse, are already retired with no strategy for spending down your assets, there are steps you can take. For many, the first one is talking through a decumulation strategy with your financial professional.
Making protected income as part of that strategy has been known to reduce anxiety associated with making your money last in retirement. In their recent research paper, “Guaranteed Income: License to Spend,” David Blanchett and Michael Finke, both of whom are research fellows with ALI’s Retirement Income Institute, highlight how retirees with assets that annuitize income spend twice as much as retirees with an equal amount of non-annuitized savings. “Retirees who are behaviorally resistant to spending down savings may better achieve their lifestyle goals by increasing the share of their wealth allocated to annuitized income,” note Blanchett and Finke, who explain doing so could take the form of delaying claiming Social Security, choosing a job with an employer pension, or purchasing an annuity. “An annuity can not only reduce the risk of an unknown lifespan, it can also allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg gradually get smaller.”
BUILDING A SECURE RETIREMENT WITH THE “BUCKET” APPROACH
Christine Benz is the Director of Personal Finance and Retirement Planning for Morningstar. Her new book, “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement,” couldn’t come at a better time. “There’s so much that’s suboptimal about the way we approach retirement,” says Benz. “Especially for people who are getting ready to retire because, you know, you’re effectively sending people out and saying, ‘here’s your savings, figure it out.’”
One of the strategies Benz often recommends to those struggling to “figure it out,” is the “Bucket” approach. Devised by financial planning guru Harold Evensky, the Bucket concept suggests retirees keep assets needed to fund their near-term living expenses in cash. “Assets that won’t be needed for several years or more can be parked in a diversified pool of long-term holdings, with the cash buffer providing the peace of mind to ride out periodic downturns in the long-term portfolio,” explains Benz.
“It’s a powerful strategy to me,” says Benz, who notes the approach is a winning one because it’s customizable, and, like an annuity, can offer the peace of mind that their basic living expenses will be covered. “It makes sense in terms of structuring a portfolio. And, it’s also, I think, an effective behavioral tool.”
EVEN IF YOU PLAN, PREPARE FOR SPEED BUMPS
Benz knows all too well that even if you have a rock-solid retirement plan, life can throw a wrench in it. She saw this firsthand with her father, who suffered from Alzheimer’s. In addition to helping to coordinate caregiving, she was also the one who took over her parents’ financial management.
While it came naturally to her, given her career, others might not be so lucky. “For the DIY type investor, that’s really problematic because obviously they’re trying to figure out a very complex problem, how to make their money last over X number of years, and they might be doing it with diminishing faculty,” shares Benz. “There’s a lot that we need to improve on, I think, especially in the realm of decumulation, figuring out how to spend what you’ve managed to save.”