Weekend Reading: The Four Unique Risks in Decumulation

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Weekend Reading

The transition from accumulation to decumulation mode can be one of the biggest challenges for retirees. In addition to requiring a mindset shift, it also presents unique obstacles that should be considered as part of your retirement planning process.


Where the phases differ: When accumulating savings, your cash flow is positive, but when you draw down those assets in decumulation, it becomes negative. Additionally, you have less control in regard to time horizon with decumulation, as the end point is determined by unpredictable variables, such as your lifespan. Beyond that, four other risks exist, including:

📌 Sequence of returns: Retirees who utilize a securities portfolio (a 401(k) or rollover IRA) as their primary source of income are most affected by sequence of returns risk. Savings loss occurs during times of market volatility when income is distributed – and, when securities must be sold to meet living expenses. As such, a drawdown strategy “that uses an asset whose return is uncorrelated with the invested portfolio” can help mitigate this risk.

📌 Longevity: To help combat longevity risk, some investment options include deferred-income annuities and buffer assets, but both should be utilized strategically.

📌 Taxes: In decumulation, you have less control over annual tax expenses. As such, a customized tax strategy is important, and one approach might include “converting a traditional/rollover IRA into a Roth IRA and treating the up-front cost of conversion as an insurance premium against the future volatility of the tax expenses associated with distributions.”

📌 Spiking Expenses: Unexpected life events can quickly derail your retirement income. You can help mitigate this risk by “reducing annual draws and/or setting aside a ‘buffer asset’ to partially absorb their impact.”

A new roadmap is in order: You need a different strategy as you transition into retirement. And more importantly, you need a process to follow to ensure all your bases are covered.