The Four Unique Risks in Decumulation

Relative to the accumulation phase, strategies that mitigate the unique risks faced by retirees in decumulation are less understood and researched. By identifying and illustrating those risks, planners can better prepare clients for retirement.

With tens of millions of Americans retired and as many planning or hoping to retire in the next decade, it is critical for investment advisors and financial planners to communicate clearly with their clients when developing a retirement-income strategy. Specifically, it is vital for both advisor and client to understand the significant differences between planning strategies that are most effective while accumulating assets to be used in retirement and strategies that are most appropriate during the decumulation phase, when drawing down those assets to sustain their cash-flow needs for the rest of their life.

While both aspects of retirement planning focus on ensuring sufficient income during retirement, the decumulation problem is unique.

During the accumulation phase, the individual’s cash flow is positive (e.g., 401(k) deferrals, company contributions, and personal savings); during decumulation, cash flow is negative (e.g. withdrawals from a 401(k), savings accounts and other personal assets like home equity cash value life insurance policies, etc.).

What is less obvious is that the time horizons for accumulation and decumulation differ. While the end point of accumulation (i.e., retirement) is usually within the individual’s control, the end point of decumulation is determined by life contingencies (e.g., death) and variables that are not easily calculable on an individual basis.