You’ve worked hard building up to the day where you clock out for the final time to enjoy the fruits of your hard-earned labour. Retirement is the day we’ve all been planning for – but the transition from a saving mindset to spending can seem scary at first and requires a new plan: decumulation.
It’s a mental shift from asking ‘how much to save?’ to ‘when to spend?’. Thankfully, there is a science behind this. Breaking into the nest egg requires thoughtful planning and strategy to ensure you enjoy your retirement – whilst ensuring your funds will last.
Let’s delve into decumulation, what it is, and how proper decumulation planning can allow you to enjoy retirement without the guilt.
Decumulation of wealth in short
Decumulation is the process of drawing down the savings that you’ve built over your working life to ensure they provide a steady income throughout your retirement.
You’ve spent much of your life focussing solely on accumulating wealth to ensure you can retire comfortably. Decumulation is essentially the opposite.
Instead, it involves taking all of the assets and wealth you have built up over your lifetime preparing for retirement and building your nest egg, and then putting in place a strategy to gradually reduce this over time while using those savings to fund the latter part of your life.
Paving your retirement runway
Decumulation is an essential part of retirement planning and requires consideration before you retire.
You want to enjoy your retirement, not spend it worrying – at the same time you want to ensure a runway to last through those latter years and protect your financial wellbeing through possible changes to your health, family needs, or living situation.
According to a study by the Financial Services Council, most Kiwis over 65 expect to run out of money within 10 years of retirement. Whilst insufficient savings can be a contributing factor to this number, proper decumulation planning can help prevent this from happening.
Implementing a decumulation strategy before retirement that covers how and when to spend your hard-earned savings will help avoid surprises or difficulties down the line – and give you the freedom to live your golden years on your terms whilst ensuring a safety net for later.
With the right advice and support on your side, you can develop a comprehensive wealth strategy that will comfortably see you through retirement without forcing you to sacrifice on your goals or aspirations.
Decumulation in action
Drawing down of assets in retirement is rarely linear. Many imagine decumulation as simply splitting your savings equally by the expected length of retirement. However, no one has a crystal ball to predict how long we will live.
One consideration to keep in mind when crafting your decumulation strategy is to understand the phases you’ll move through during retirement. We’ve broken this down as follows:
- Phase 1: First 5-10 years
The first 5-10 years of retirement is where you’ll likely spend a larger chunk of your savings. Throughout this time, you’ll hopefully be in good health and have the energy to tick off the bucket list items. This period may include travelling to the places you’ve longed to visit, chasing the hobbies you were never able to take up, and spending more time with loved ones. - Phase 2: Next 10 years
The following 10 years may be less active. Expenditure on big-ticket items has passed and those bucket list experiences are well and truly ticked off. You may see yourself craving a slower-paced life with less hustle and more relaxation. As your daily routine involves stability and predictability, your expenses will likely be easier to plan for. During this phase, the balance will be enjoying the simplicity of routine whilst keeping rising health and fixed costs front of mind. - Phase 3 – Final years
Your final years brings more time throughout your day to revel in all you’ve achieved in life and reminisce on those most precious memories. This is the phase that makes a well-crafted decumulation strategy all the more worth it. You may expect higher health costs and require additional help to support your day-to-day living. You may also think about the legacy you want to leave behind, which may include legal costs of estate planning to ensure your wishes are honoured following your passing.
By understanding the significance of each of these phases and how they will affect your retirement strategy for withdrawing your savings, you can create a comprehensive plan to support your goals to the end of your lifetime. Your plan should be flexible enough to change and move with life’s ups and downs, which a Financial Adviser can help with.
To fund each phase of your retirement, we suggest keeping your savings in three buckets:
- Liquidity: For phase one you’ll need money to live on and have access to cash for unexpected emergencies.
- Income: For the latter part of Phase 1 and into Phase 2 you’ll want to keep this money invested in a mix of moderate-risk investments to ensure your nest-egg continues to grow in value while the need to access it is minimal.
- Inflation: The last bucket is the pool of money invested in higher-risk asset classes that can keep up with inflation. Money loses value over time, so it’s important to ensure your savings are safe guarded from inflation. Because you won’t need to access this money for 15+ years, you can likely afford to take on more risk and ride the volatility wave that allows your investments to recover from lows and grow over time.
Enjoying your golden years without the guilt
Transitioning from accumulation to decumulation can feel mind boggling, which is understandable. After all, you’ve worked hard to build it your nest-egg whilst fighting the temptation to dip into it throughout your working life – and now you need a new plan?
We like to say that crafting a decumulation strategy allows you to enjoy your retirement on your terms and without any guilt. A plan helps to take the guess work out of when and how you should spend your retirement savings while ensuring it will last – for you and your loved ones.
If you need assistance to make sure your retirement plan goes smoothly, a financial adviser can guide you through the overwhelming parts of the decision-making process so you can decide how best to draw down your assets. Working with a professional means you can have someone on your side to design a plan ensuring the frequency of withdrawals (in place of income) suit your lifestyle whilst preserving capital that balances defence and growth for those later years.
Decumulation with longevity in mind
Maintaining your retirement savings is like tending to your garden with regenerative practices. It starts with ensuring a healthy diverse foundation that will enable your savings to flourish and grow following harvest year after year.
Like gardening, you don’t want to disturb the grounds by ripping your crop out in one go. As such, a sound decumulation strategy allows you to pick off a little bit each time you need it whilst nurturing the rest to grow throughout the coming seasons.
If you’re interested in exploring decumulation strategies with longevity in mind, we invite you to book a financial review with an AdviceFirst Wealth Adviser. Reach out to the AdviceFirst team on 0800 438 238 or email hello@advicefirst.co.nz.
Disclaimer: This blog is for informational purposes only and does not constitute individual financial advice.
