Finances in Retirement - Investments

Three Causes of Decumulation Mistakes in Retirement and How You Can Avoid Them

by Alli Thomas

Oct 21, 2022

If you’ve never seen it before, “decumulation” is the opposite of accumulation. It is effectively a fancy word for converting your retirement assets into a stream of income.

Many retirees have a really hard time shifting their mindset from saving (accumulation) to spending (decumulation), while others may access their benefits (or savings) faster than advisable.

Causes of Decumulation Mistakes

Here are three common causes of decumulation mistakes that can result in overspending or excessive asset drawdowns from your portfolio:

Loss Aversion

In the context of decumulation, loss aversion refers to the fear some people experience of losing benefits in retirement if they do not access them as soon as possible.

An example of this would be claiming Social Security benefits as soon as you’re able to – not because you need the money then, but because you’re afraid you’ll otherwise lose them altogether (a strategy that may not be in your best interest).

Psychological Ownership

This refers to the feeling of something being yours, which, when talking about financial planning for retirement, may also lead to sooner-than-advisable usage of entitlements, investments, or savings.

An example of this is how many retirees think of Social Security benefits as a “deserved reward” for working their entire lives. This mindset can make delaying benefits until full retirement age more difficult.

Self-Control Issues

Not having a decumulation strategy and depending on self-control to manage retirement spending can cause tension between short-term and long-term goals. For example, wanting to save for later years could come into conflict with the desire to use your assets to enjoy life in retirement.

How You Can Avoid Making a Decumulation Mistake

Here are some approaches that researchers recommend retirees that are looking to avoid making decumulation mistakes:

  • Increase financial literacy. Some researchers advocate for a training program for retirees ahead of making large financial decisions.
  • Automatic drawdown options. In the same way that automatic 401(k) contributions help workers save for retirement, automatic drawdown options such as an automatic conversion of savings into an annuity could cause retirees to have more guaranteed retirement income.
  • Customized intervention. Working with a financial planner who can create a decumulation strategy by guiding you through decisions that appeal to your personalized needs and desires may be the best way to prevent making decumulation mistakes and help ensure you don’t run out of money due to excess spending.

If you haven’t thought about decumulation yet or would like to discuss your thoughts with a professional advisor, we can help. Click here to schedule a free, no-obligation advisor consultation or browse our advisor directory to contact an advisor of your choice directly.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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