The Decumulation Switch-Up: From Saving to Spending

Many of us spend the vast majority of our working years worrying about whether or not we are saving enough – in our children’s education funds, in our insurance products, and in our retirement accounts. It can feel like whiplash to suddenly come to the point when you need to start taking money out of these accounts, not putting assets into them. While spending may seem easier than saving, decumulation requires just as much planning as accumulation. Which account should you spend from, and how should you balance the implications of using tax-deferred assets? When should you and your spouse begin to receive social security benefits? When should you pay out-of-pocket for certain medical expenses, and when is it time to start using the benefits of a long-term-care policy? Developing a strategy with your financial professional is key to minimizing stress around how to efficiently spend your hard-earned savings.

First, you may want to consider how much you will need to continue covering your cost-of-living expenses. Evaluate your spending history to figure out which expenses will continue unchanged and which will increase or decrease once you are retired. For example, many people plan to have their debt paid off prior to retirement, which would be a cost you’d no longer need to worry about. On the other hand, unexpected expenses might show up in this new phase. For example, you may have received company-sponsored health insurance, for which most of the cost was invisible to you because it was deducted from your paycheck prior to it being deposited. Now, you may qualify for Medicare but still need to pay out-of-pocket for your supplemental plan. On average, a retiree will spend 10% less each decade of their retirement.¹

Once your expenses have been ironed out, you and your financial professional can start analyzing each facet of your financial picture to find the right balance of withdrawals to achieve your plan. First, you may want to consider the ideal time to begin receiving Social Security. If you are married, the spouse with the larger benefit may want to wait until they are 70 to begin receiving payments in order to help maximize their long-term payout. If cash flow is a concern in these early years,  the lower-earning spouse may want to begin payments sooner, which could augment your income stream early on.

How much will a pension or annuity add to your annual income? Ideally, covering as many of your known expenses as possible with a steady stream of guaranteed income allows you to be strategic about spending. For example, in some instances, investing income from various sources into taxable accounts and taking regular disbursements from your 401(k)/Traditional IRA can help with long-term tax management. Depending on the size of your tax-deferred accounts, leaving them to grow until required minimum distributions kick in could land you in a much higher tax bracket later in life. Taking funds out of tax-deferred accounts to cover expenses while investing excess cashflow could help minimize tax inefficiency risk, however be sure to discuss this with your financial professional to help avoid potential fees, taxes, or penalties that may apply.

Speaking of risk, your financial professional can help you reduce market volatility risk through proper asset allocation that adequately considers your personal retirement timeline.  You can work with your financial professional to analyze your income needs situation and refine it by comparing multiple cash flow scenarios.

When thinking about your plan for spending in retirement, remember that variable annuity products could allow you to decide when to turn on the income stream. If additional income is not necessary early in your retirement, the annuity assets can remain in their account, in many cases growing tax-deferred in the investments available to you with your particular product. If you never need them, an annuity is often easy to pass along to your heirs. Annuities are flexible both in how you use them and how you pass them along, either as a lump sum or an annuitized series of payments.

Each person’s situation upon retirement is unique. Your financial professional can review each detail with you and tailor a decumulation plan to your specific needs.