Accumulation vs Decumulation: spending is more complicated than you thought.

In my last post, I promised some insight on how insurance products can be beneficial in helping reduce some of the key risks we face once we have decided to retire. However, I am going to start with a more general topic; Spending your nest-egg is more complex than building your nest-egg.

The accumulation phase of life is really quite straightforward: work hard, save hard, and invest wisely. The key piece of this challenge will be your ability to stick with an appropriate investment plan and not let your emotions get in the way. Pretty simple. Everyone one wants the highest return per unit of risk possible – no matter what their age.

Ironically, once the nest-egg is built, we now face the daunting task of spending it appropriately (decumulation). There are more questions to be thought about, and the solutions are more complex.

I am always perplexed when I meet an individual who says that now they are retired, they have no use for a financial advisor. Say that again? You used a financial advisor for the accumulation phase – which was simpler – but now that things are going to get more complicated, you want to go it alone? Not a good move in my book.

So, off my soapbox, back to the last post – longevity risk……..the risk you out-live your savings. One way to deal with Longevity Risk is to purchase an Immediate-pay Fixed Lifetime Annuity. This is a product that pays you a guaranteed sum each month for as long as you live. It turns part of your nest-egg into an income stream that never runs out. Pretty cool right?

The positives are that you never out-live the income stream, and the actuarial rates being used are taking into account the mortality of a large group of people. They can use an average life expectancy to price the product/risk. This helps solve the pesky financial planning problem of guessing how long one is going to live.

The negatives are that you have nothing left to leave for your children, and that you have locked in an interest rate for the rest of your life. If inflation or interest rates move higher over your retirement, this may not be such a good move.

Is this appropriate for you?  How much flexibility do you have in your monthly budget?What are your thoughts about bequests to your children?  During the accumulation phase, everyone wants the highest return per unit of risk. Now that we are decumulating we see a greater variety in desired outcomes. Getting more complex…….and this is just the tip of the iceberg. Let’s call it part of Decumulation 101.

For example, I just played around on the internet, and was quoted between $1,970 and $4,229 per month for a 55 year-old male with 1 million dollars to spend. The range of $1,970 to $4,229 depends on a variety of options I can choose. Some are OK, some not. But, they are another example of the complexity that pops up when thinking of appropriate spending plans.

Normally, spending is a source of fun (just ask my wife), but in retirement, spending appropriately is not as simple and straightforward as imagined! We will be back to this topic in future posts I can assure you. This is just a scratch on the surface.