Savings Decumulation vs Accumulation

All your life, you’ve heard about the importance of saving for the future. Set a little money aside each week, they say, and you’ll eventually find you have a nice little nest egg. But when it’s time to retire, the concept of saving for the future changes. “The future” has arrived, after all. It’s time to enjoy the fruits of your years of labor. This is known as decumulation.

Stephanie Faris

Published October 7th, 2021

Table of Contents

Key Takeaways

  • Accumulation is the process of setting assets aside in preparation for the future, such as saving for retirement.
  • When you’re in the decumulation phase of your life, you will be depleting your savings rather than accumulating it.
  • There is an in-between phase, often towards the end of your career, that is the retirement income planning phase.

All your life, you’ve heard about the importance of saving for the future. Set a little money aside each week, they say, and you’ll eventually find you have a nice little nest egg.

But when it’s time to retire, the concept of saving for the future changes. “The future” has arrived, after all. It’s time to enjoy the fruits of your years of labor. This is known as decumulation.

What is Accumulation?

Throughout your adult life, you work hard to pay the bills. In the process, you hopefully can set a little aside. This is known as “accumulation.” If you’re gathering resources, you’re accumulating wealth.

Retirement accumulation refers to the process of setting money aside for the day you leave the workforce. Some employers offer this option, either in the form of a 401(k) or a pension. You can also set up an individual retirement account (IRA) or invest the funds.

But there are other ways you accumulate wealth over the years. Your home, for instance, earns equity during the time you live there. When you retire, hopefully you’ll be able to either pay the home off and live mortgage-free or use the equity for a hefty down payment on another home.

Saving for retirement is pretty straight forward, spend less than you make, save early and often, take advantage of compound interest by using accounts and assets that grow over time.

What is Retirement Income?

As you’re weighing accumulation vs decumulation, there are big planning decisions around when to switch from accumulation to decumulation. In this phase you are setting dates around when to leave the work force and big decisions around things like pensions and Social Security. You will spend time looking at your expenses and assets and deciding the rate at which you’ll need to withdraw funds to ensure you have enough to last.

During this phase, it’s important to also keep inflation in mind. If you take too much out of your retirement savings, you may not have enough to last you. Also factor in whether you want to leave assets behind for loved ones.

What is Decumulation?

The retirement decumulation phase refers to the period of time when you’re depleting assets rather than storing them. The rate at which you deplete those assets is unique to you. It will be different from the rate at which other retirees decumulate.

In recent years, retirees have had to be more conservative in their approaches to decumulation. Life expectancies have increased, so it’s possible a retiree could live 30 years or longer after leaving the workforce. Still, you may not be completely in decumulation mode after retirement. Some of your investments could continue to earn interest, and you may opt to continue to work part-time to bring some money in.

With your retirement savings accounts, one of the best things you can do is plan out how much you’ll take in distributions each year. This will give you control over how long it lasts. You can set a budget and consider how much you’ll need to supplement your Social Security income and any pension funds you have coming in on a regular basis.

Why Switch from Accumulation to Decumulation?

Shifting from accumulation to decumulation is more than just a budgeting change. You also need a mindset shift.

For most retirees, switching to decumulation is by necessity, not choice. You could, of course, keep working, but at some point, you’ll likely want to spend a little less time at the office and a little more time traveling, seeing family, and pursuing hobbies.

When it is time to retire, it’s important to inventory your assets and shift riskier investments to those that will generate steady, reliable income. The more income you can get coming in, the longer your retirement savings will stretch.

Final Thoughts

Whether you’re still accumulating or preparing for decumulation, it’s important to have a plan. Starting a budget while you’re still accumulating can give you somewhere to start when you do finally retire. We also recommend working with a certified financial planner to make sure your retirement savings accounts are fully funded, including accounting for taxes on any distributions you’ll be taking during decumulation.

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Author

Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

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