“Decumulation” – yes, it is a word!
Retirement marks a significant milestone, a phase of life where years of hard work and diligent saving culminate in the opportunity to enjoy the fruits of one’s labour.
However, while much emphasis is placed on the accumulation phase of retirement planning—saving and investing for the future—the decumulation phase, which involves spending those savings, is equally important. Proper decumulation strategies ensure that retirees can sustain their lifestyle and financial independence throughout their retirement years.
In this part of a two-part series, we discuss the concept of decumulation, its importance, and the various strategies that can be employed to optimize retirement income. In the second installment we will discuss how to minimize taxes as assets are liquidated.
Understanding Decumulation
Yes, decumulation is actually a word and it refers to the de-accumulation of assets in order to maintain your lifestyle in retirement. It is the process of converting retirement savings into a steady income stream to cover expenses during your golden years. Unlike the accumulation phase, where the focus is on growing the nest egg, decumulation is about managing withdrawals to ensure that the savings last throughout your lifetime and beyond, should you wish to leave a legacy.
The Importance of Decumulation Planning
Effective decumulation planning addresses several key challenges:
Longevity Risk: With advances in healthcare, people are living longer, making it essential to ensure that savings can support a potentially extended retirement period.
Inflation: Over time, inflation erodes purchasing power. A robust decumulation strategy accounts for inflation to maintain your standard of living.
Market Volatility: Economic downturns can significantly impact retirement savings. Decumulation plans should mitigate the effects of market volatility on withdrawal rates.
Planning for a Legacy: You may wish to leave an estate to your children or a charity when you pass away.
Decumulation Strategies
There are various strategies to manage the decumulation phase effectively. Here are some of the most common:
Systematic Withdrawal Plans
A systematic withdrawal plan involves taking a fixed percentage or dollar amount from retirement accounts each year. This method provides a predictable income stream but requires careful consideration of withdrawal rates to avoid depleting the savings too quickly. Your advisor can help you in the management and investment of your assets to ensure sustainable withdrawal rates.
Annuities
Annuities can provide a guaranteed income stream for life, offering protection against longevity risk. There are different types of annuities, such as fixed, variable, and indexed annuities, each with its own set of features and benefits. If you are someone who is completely risk averse you may want to explore annuities with your advisor.
Government Benefits:
Canada Pension Plan (CPP) and Old Age Security (OAS): These government benefits provide a foundational income stream in retirement. Understanding at what age to take these benefits can significantly impact the amounts that you receive. For example, drawing your CPP at age 70 rather than 65 means that your monthly benefit will be 42% higher. Your advisor can help you to look at the options available to you.
Decumulation is a critical aspect of retirement planning that requires a well-thought-out strategy to ensure financial security and peace of mind. Your Foster & Associates advisor and financial planning team can help you to understand the various decumulation options. Working together, we can develop a plan that will ensure that you enjoy a financially stable and fulfilling retirement and can leave a lasting legacy if you so desire.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
