Retirement decumulation is a critical and often more complex phase of financial planning compared to the accumulation phase. The stakes are high because retirees only have one opportunity to manage their assets correctly and ensure they last throughout their lifetime. Unlike the accumulation phase, where time and market growth can help recover from mistakes, decumulation comes with a finite window for decision-making and no margin for error.

Key Aspects of Decumulation Risk Management

Safe Withdrawal Rate Adjusted to 3%

• Rationale for 3%: Reducing the safe withdrawal rate to 3% (from the commonly cited 4% rule) provides a more conservative and sustainable strategy, especially given the uncertainties in the market, potential longevity, and inflation risk. This lower withdrawal rate helps protect against running out of money, particularly in periods of low market returns or prolonged lifespans.
• Impact: With a 3% withdrawal rate, retirees are withdrawing less of their portfolio each year, allowing for greater preservation of capital. While this approach reduces the risk of depletion, it also means retirees need to balance a more modest lifestyle or rely on other income sources (e.g., Social Security, pensions).
• Example: For a retiree with a $1,000,000 portfolio, a 4% withdrawal rate would yield $40,000 annually, whereas a 3% withdrawal rate would provide $30,000 annually. The lower withdrawal amount reduces the likelihood of outliving the portfolio, especially during adverse market conditions.

One Chance to Get Decumulation Right

• High Stakes in Decumulation: Unlike the accumulation phase, where time is an ally, decumulation is a high-stakes phase where missteps can be detrimental. A significant mistake, such as withdrawing too much too early or experiencing a market downturn without adjusting withdrawals, can lead to running out of money.
• Limited Recovery Options: In the accumulation phase, investors can often recover from setbacks through increased contributions, higher risk exposure, or waiting for market rebounds. Time is on the side of accumulators, allowing for compounding growth to work in their favor.
• Decumulation Challenges: In decumulation, retirees are simultaneously withdrawing from their assets and exposed to market risks. A poor decision, such as maintaining a high withdrawal rate during a bear market, can rapidly erode capital, leaving little room to recover, especially without the opportunity to replenish funds through employment.
• Example of Sequence of Returns Risk: If a retiree experiences a significant market downturn early in retirement, the combination of negative returns and ongoing withdrawals can cause the portfolio to diminish faster than expected. Even a subsequent market rebound may not be sufficient to restore the portfolio’s value, making it challenging to sustain the initial withdrawal rate.

Comparison of Accumulation vs. Decumulation Phases

Accumulation Phase:

• Long Runway: Investors have a long investment horizon and can take on more risk for higher potential returns. Mistakes such as poor investment choices or market downturns can often be rectified over time with strategic adjustments, dollar-cost averaging, and continued contributions.
• Time and Contributions as Allies: Time allows compounding to work in favor of the investor, and ongoing contributions can help average out costs and increase wealth even after periods of negative returns.

Decumulation Phase:

• Finite Time Horizon: Once retirement begins, the focus shifts from growing assets to preserving and distributing them. Time is no longer a buffer, and there is no opportunity to contribute more to the portfolio.
• No Margin for Error: A single mistake—such as an overly aggressive withdrawal strategy, not adjusting for market downturns, or failing to consider longevity risk—can significantly impact financial security. Retirees cannot rely on additional income from employment or the market recovery over decades to restore lost wealth.

The Psychological Impact of Decumulation Risk

• Retirees often experience anxiety and uncertainty during the decumulation phase, as they witness their portfolio decrease with each withdrawal. This emotional strain can lead to poor financial decisions, such as overly conservative investments (missing out on potential growth) or an increased reluctance to spend (reducing quality of life).
• Advisors and retirees should focus on creating a plan that balances income needs with long-term sustainability. Establishing a spending framework that considers varying market conditions can help mitigate some of the psychological stress associated with decumulation.

Conclusion

In retirement decumulation, there is a critical need for precision and caution because retirees only have one chance to get it right. Withdrawing assets at too high a rate, especially during early retirement years, can permanently damage a portfolio’s ability to sustain income throughout retirement. Adjusting to a 3% withdrawal rate is a prudent strategy that enhances the likelihood of preserving capital and sustaining income, but it also requires careful planning to ensure sufficient income is available for lifestyle needs.

Retirees must balance the need for income with the realities of longevity, inflation, and market risk. By acknowledging the high stakes of decumulation and adopting conservative strategies, retirees can reduce the risk of running out of money and maintain financial security throughout their lives.