Helping Create Retirement Income: 2 Retirement Decumulation Strategies

A woman seated at a kitchen table reviews financial documents on retirement decumulation strategies

Key Takeaways

  • Decumulation is the process of spending down assets you've accumulated over your lifetime in retirement. It involves new strategies compared to the accumulation stage.
  • Securing lifetime income sources like Social Security, pensions, and annuities can provide guaranteed income that lasts as long as you live. This gives confidence to spend money in retirement.
  • Drawing down from retirement savings can supplement lifetime income but involves risks like market volatility and longevity uncertainty. Decide an appropriate and sustainable withdrawal rate.
  • Having sufficient guaranteed income to cover basic needs can minimize risks. Additional savings can be used more flexibly.
  • Work with a financial professional to design a customized decumulation strategy for your situation and risk tolerance.

Preparing for retirement typically involves decades of saving for the future. If you're like most people, you primarily focus on adding money to dedicated accounts and investing for long-term growth during that time.

But when you stop working, things change. Instead of accumulating funds, you switch to retirement decumulation strategies. Decumulation is the process of spending down assets you've built over your lifetime. As you manage this asset allocation in retirement, you'll want to ensure you can pay for basic needs like food and health care. You'll also want to fund discretionary spending for things you enjoy, such as entertainment and travel.

Advantages of the Decumulation Stage

Retirement decumulation strategies can help you reap the benefits of your working years. There are reasons to thoughtfully approach this stage of life:

  • Design the life and schedule you want without needing to work for income.
  • Get a "license to spend" with confidence using lifetime income sources that will last for the rest of your life.
  • Rely on guaranteed income, as opposed to hoping for favorable market movements to build your assets as during the accumulation stage of life.
  • Assess the value of home equity, which may be one of your biggest assets.

It's critical to make sure your money lasts for the rest of your life, so you may need to employ new tools and refine your asset allocation in retirement.

2 Decumulation Strategies to Consider

Your transition to the decumulation stage of life can be intimidating. But with a well-designed plan in place, you can give yourself permission to spend the money you've worked so hard to build. Various tools and techniques can help provide financial stability during retirement.

Here are two decumulation strategies that can potentially help you reach your goals in retirement:

1. Securing Lifetime Income Sources

Guaranteed lifetime income may be valuable for retirees. If you know that an income stream will last for the rest of your life — no matter how long you live — you're likely to have more confidence to spend money and enjoy life. There are several sources of lifetime income:

  • Social Security is available to most workers, providing a government-guaranteed income with inflation adjustments. The amount you receive depends on factors such as your work history and your age, and you have some control over when benefits begin.
  • Pensions, also known as defined benefit plans, are available from some employers. But these plans are less common than they used to be, spurring many workers to shoulder the burden of the accumulation and decumulation stages in life.
  • Annuities allow you to create a lifetime income with help from an insurance company. With an annuity, you can convert assets into a stream of payments that last for the rest of your life. In many cases, you can also add a spouse's lifetime and choose among options that allow for death benefits and other guarantees.

The primary benefit of setting up lifetime income sources is receiving payments that will continue for as long as you live. It may be wise to match those income sources to your basic needs to help cover the cost of the things you need most.

2. Drawing Down Savings

When you need money in retirement, you can pull from savings in retirement accounts like your individual retirement accounts (IRAs) and 401(k) plans. Those assets might supplement your lifetime income sources, or you might take a lump sum for one-off expenses like vacations or home improvements.

Spending down your assets can be challenging because you may face several unknowns. For example, you can't predict how the markets will perform, and taking withdrawals during a market downturn can threaten to take a big dent out of your savings. Plus, you don't know how long you'll live (and, therefore, how many years' worth of withdrawals you need to budget for) or what surprises will arise.

Ultimately, you need to decide how much is appropriate to withdraw. To estimate that number, consider your tolerance for risk, run some numbers with a retirement calculator , and discuss your findings with a financial professional. If you want to turn your savings into a guaranteed stream of income, consider adding a lifetime annuity to your asset allocation in retirement. That way, you can help ensure that your money lasts as long as you do.

Bottom Line

Switching from an accumulation mindset to a decumulation one is an exercise in risk management. To minimize risk and improve your chances of success, it's wise to have a healthy amount of guaranteed income that covers basic needs. From there, you can decide how much to leave to chance in the markets.

For help designing a strategy, speak with an experienced financial professional, who can guide you through the process and offer a customized look at your individual situation.

Live More & Worry Less

Live More & Worry Less

We have financial professionals ready to assist you on your retirement journey.

Related Retirement Income Planning Articles


Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.