Taking the Emotion out of Decumulation


If you’re like most people approaching retirement today, you’ve been saving and investing for decades. You’ve made sacrifices over the years – perhaps you drove your car until it quit, skipped the extravagant vacations, or regularly clipped coupons. Saving money, of course, is a good thing. Perhaps your thrifty habits are what allowed you to prepare for a retirement on secure footing. And at some point, you should be rewarded for your hard work with the retirement you’ve been planning for all along. 

But for many folks, just when that turning point should occur is a mystery. After all, once you enter retirement, your financial life enters an entirely new phase that you must be prepared for – the switch from saving money to spending it. In financial circles, we call it switching from the accumulation phase of your life to the decumulation phase, where instead of socking away as much as you can you now begin drawing on your savings to replace your paycheck. This is a life-changing event and you don’t want to get it wrong, but how do you determine when you – and your portfolio – are ready? 

After all, the financial services industry has focused heavily on helping people keep on track with saving for retirement – but I find that very few folks in the industry teach how to build a sound retirement system for the decumulation stage of one’s financial lifecycle. 

I encountered this situation recently during a meeting with a guy from North Falmouth, Mike. Mike’s a really neat guy.  He is fifty-nine years old, been married for decades, has a daughter in high school, and was seeking some advice. Get this, while Mike has earned a modest living – bringing home on average about eighty thousand bucks each year – he is what you’d call “The Millionaire Next Door”.  Mike has incredible savings habits, he has amassed well over a million dollars in his portfolio, and his home is paid in full. He has no outstanding debt and lives well below his means. And you know, they guy has college money tucked away too for his kid.  

So, we sat down to review his situation.  We concluded he could easily retire now without lowering his standard of living – and perhaps even spend more than he does now. However, Mike was clearly uncomfortable with the idea of early retirement. His concern? He doesn’t know that he’s ready to start spending his savings. After he saw what happened to his investments last March and living through 2008 doesn’t help either.  Mike’s afraid to start tapping into the money he has so carefully saved. Like many folks, he has an emotional attachment to that big pot of money, and this is keeping him from making a decision about when to retire.

Folks, Mike’s situation is not uncommon. You see, many folks have a strong aversion to losses. And while this is a good thing when you’re invested in the markets and trying to set money aside, many people actually see spending as a loss in retirement. Seeing their accumulated assets wind down is just too painful for some people. They get a sense of satisfaction and security by maintaining their wealth even as they age. 

In fact, according to a recent study by Wells Fargo, retired households with less than $200,000 accumulated in a defined contribution plan at retirement tend to spend down only about a quarter of their assets during the first two decades of retirement₁. Over almost two decades, retirees in the study mostly refrained from spending down assets in their 401(k) or IRA and instead lived off of other sources of income instead, such as social security, pensions, and RMDs. Some of this reluctance to spend this money originates in feelings of psychological ownership over those funds. In addition, there are also emotional costs to retiring, since retirees can report feeling bored, lonely and lacking in identity without a job to go to every day, and it is important to take those costs into account as well.

And because the decision of when to stop working can be financially and emotionally difficult for people, there is no one-size-fits-all solution; each case will depend on a variety of personal considerations. So what can you do if you find yourself struggling with this decision? Here are a few ideas to ponder.

First, set aside the financial focus for a minute and consider your goals for retirement. In other words, what plans and activities are you saving for? Reducing stress about your retirement can evoke more positive emotions about the future and make a discussion of your financial options to support your future more pleasant. For example, when thinking about longevity, focus on how long you expect to live instead of when you expect to die. This small change in wording can help you view retirement in a more positive light, making the conversation easier to have.

Consider separating your money by purpose – for example, you might put money you need to cover basic retirement expenses, such as housing and taxes, in one account, and keep money earmarked for vacations and other frills in a separate account. A retiree with $1 million who needs about $40,000 to cover basic expenses, for example, might keep $800,000 in his core portfolio and $200,000 in his discretionary bucket. By following your safe withdrawal strategy religiously in your core account, you then give yourself more flexibility to spend the discretionary bucket however you like without the fear of not being able to meet your basic living expenses.

And folks, make sure you have an appropriate decumulation or distribution investment strategy.  You know, the one that emphasizes downside risk mitigation using quantative data to give you the highest probability of financial success. The phrase commonly used, “…but it always comes back” may be true . . . but when.  A decumulation strategy should be designed to drive consistent income and heavy losses from an inappropriate accumulation strategy could potentially destroy income.

An aversion to loss and strong psychological ownership can easily lead to poor decision-making. But regular check-ins with a retirement specialist about your personal retirement goals, and then pre-committing to plans that can accomplish those goals, can help you stick to a strategy that makes the best use of your retirement income options – and gain the confidence you need to enter retirement and spend wisely.

So as always – be vigilant and stay alert, because you deserve more!

Have a great week folks.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Market data and other cited or linked-to content in this article is based on generally-available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A and applicable Form ADV 2Bs. Please contact us to request a free copy via .pdf or hardcopy.  Insurance instruments offered through CutterInsure, Inc. 1. https://tinyurl.com/3zpvmj7s