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:
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).
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.
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.