An Introduction to the Decumulation Phase
Retirement is like a coin; it has two sides. Instead of heads and tails, the retirement “coin” has accumulation and decumulation sides.
The accumulation side gets the most press and is the area where most financial advisors spend their time. While accumulation is important, it is only part of the equation.
Do You Fear Outliving Your Savings?
As advisors, we tend to think of the accumulation phase as the easy part. It is easy for us because we don’t have to make the daily sacrifices to set aside the money; we just have to figure out how to make it grow.
Decumulation tends to be a bit more complex. Here’s why: In the accumulation phase, market fluctuations and investment risks can be smoothed over time. During decumulation, there is less room for error.
A decumulation strategy can help ward off the top fear of most retirees: outliving savings.
The fear of outliving savings is so great among retirees that it often overshadows the fear of death (61 percent vs. 39 percent). When we think of living out our golden years, it certainly should not include images of waking in the middle of the night worrying about paying bills.
Having a plan that coordinates the receipt of income and retirement benefits to offset expenses can help alleviate fears of outliving your money. It allows you to structure your portfolio to provide both income and growth, and can prevent you from making bad payout decisions.
A common issue many baby boomers now face is that they have overlooked the need for growth in their portfolios throughout retirement. As retirement nears, many grow more conservative with their investments. Many retirees look to traditional fixed-income strategies to provide the cash flow needed to “keep the lights on” throughout retirement. What keeps them up at night is the worry that those investments aren’t keeping pace with inflation and unforeseen rising expenses, such as health-care costs.
Our approach to preventing this worry from dampening our clients’ retirement, we provide every bit as much focus on the decumulation phase as we do accumulation strategies.
One strategy we recommend is the use of Durable Income investments. Durable Income investments have many of the same attractive features of traditional fixed income — they can provide income and more predictable returns. What makes them appealing in a rising rate environment, like the one we are currently in is that they may be more resilient to economic downturns and changes in credit and market risk. They may help mitigate risk by diversifying your retirement portfolio while also providing the opportunity for capital gains.
Where once advisors sought fixed-income investments for retirees, these traditional investments may no longer be able to offer the reward for the risk. As interest rates begin to climb and duration becomes important, bonds lose their appeal.
Consider the following pros and cons of different investments:
» Bonds: While bonds are an important part of a balanced portfolio as a fixed income security, in a rising interest rate environment, the price of bonds may decrease. The duration and quality of bonds are critical.
» Equities: During the accumulation phase, there may be more tolerance for market volatility. However, this is not the case in the decumulation phase.
» Cash: “Cash is King” except for when it is not earning enough to keep up with inflation.
» Alternatives: These investments may provide durable income and improve portfolio efficiency as they have low historical correlation in comparison to traditional investments. While there is the potential for long-term growth these investments are less liquid than traditional investments and are therefore considered riskier.
AmeriFlex Is Here to Help
Our AmeriFlex team takes pride in providing a holistic approach to your financial life. We focus on all the financial levers, and when it comes to retirement that includes accumulation and decumulation. As you begin the next phase of your life, do so with confidence in your ability to balance your expenses and income. We are here to help.
You have spent a lifetime accumulating a nest egg for retirement. As you prepare for the next stage in your life, you face the challenges of low yields from banks, higher federal and state taxes, when to take social security, and increased medical costs. AmeriFlex is prepared to help you face these risks and protect your nest egg by building a durable income stream to match your expenses in your retirement years. You don't have to face these challenges alone — we can help.
We have 25 years of experience helping individuals and families generate income and mitigate longevity risk — make your nest egg last the rest of your lifetime.
— Thomas Goodson, ChFC, CLU, CASL, is a wealth manager for AmeriFlex Financial Services. To learn more about how alternative investments might help you reach your financial goals, please call 805.898.0893 or click here.