As we progress through the early stages of our working lives, our focus is on savings or the ‘accumulation’ of money, things and experiences. In retirement our relationship with money changes as we switch from accumulation to decumulation. The importance of effective decumulation is growing as clients are, on average, living longer and interest rates remain at historic lows – a challenging combination!
Decumulation is actually a real word! It refers to the de-accumulation of assets in order to maintain your quality of life in retirement. It’s much more complex than the accumulation of assets. During the accumulation phase of your life you basically need to save and invest efficiently over time (diversify, keep your portfolio tax efficient, and at a sensible cost). That’s it!
Setting up lifetime income involves trying to ensure your funds last for the remainder of your life, whilst hopefully meeting several other objectives at the same time. In order to decumulate efficiently, effective tax planning strategies using all your personal allowances will help make your funds last longer. Did you know that from an investment perspective, if you utilise all your personal allowances for income and capital gains, you can potentially earn £30,000pa tax free. If you are married, this can enable £60,000 gross (and net) into the household with zero tax! To enable this however, you do need to accumulate your assets in the right vehicles in the first place, which is why in the accumulation phase, effective tax wrappers are so important. So it’s really all down to effective planning. Accumulation and decumulation are, therefore, two sides of the same coin. There’s a lot at stake and it’s worth checking your planning is on track as for decumulating efficiently.
Things To Consider When Planning For Decumulation
Speaking from experience, here are some of the top things to consider:
- Get mentally prepared to shift from saving to spending down your assets. It’s psychologically hard for savers to become spenders, so you need to think this through in advance or you’ll run the risk of not enjoying the fruits of all of your hard-earned savings and investments.
- Document your spending and build a real budget. This is so important. It is also an opportunity to imagine what you want your life to look like and get more efficient about your spending.
- Ensure your investments are set up in a way that makes you confident. Don’t just look at the returns you make, look at the journey and the market conditions. In most cases this money cannot be re-earned, so your planner should be looking to find a return and risk level that is suitable to your needs and makes your life work. Try not to be preoccupied with actual investment return. Returns are important, but most often high returns mean taking increased risk, and too much risk can derail your plans if it goes he wrong way.
- Follow an advice proposition that reviews and actively monitors your assets, income and risks over time versus your objectives.
- Understand what you must spend versus what you would like to spend.
Finally, did you know that the average retiree spends about 10% less per decade in retirement, so if you retire at 60, then at 90 you are likely spending 30% less in today’s terms than you were at 60? (source; Forbes 30/09/19)
Planning for decumulation is important and worth discussing with your financial planning consultant – if you haven’t done so already!