How to Create a Decumulation Retirement Strategy

Read our Advertiser Disclosure.
Contributor, Benzinga
December 19, 2022

No matter how long or how much you saved for retirement, there will come a day when it is time to dip into that savings. Retirement savings are meant to provide a source of income so you can continue to live comfortably after you retire. But retirement savings aren’t bottomless, so it’ll take some thought and planning to find the best way to allocate your savings. This process is called decumulation, and though it may sound tricky, it can be the key to financial stability throughout retirement.

What is the Decumulation Strategy?

Accumulation refers to the time spent on building up retirement savings during working years. Decumulation is the opposite. Decumulation typically starts when the investor begins to cut back their working hours. Once that income takes a hit, the investor may need to start taking withdrawals from their retirement savings. That’s when decumulation begins.

Decumulation is an important part of retirement planning. It’s the process of making retirement assets and savings a reliable stream of income. This process typically includes determining how much the investor will need to withdraw on a normal basis and how to start liquifying assets within the retirement account. 

Retirees can use many strategies to go about this process. But each retiree is unique, with different income streams, lifestyles and expenses. A single tried-and-true strategy that will work for all retirees doesn’t exist. But there are general rules of thumb that retirees and advisers can use to find the best strategy for each investor.

What’s the Goal of Decumulation?

The goal of decumulation strategies is simple: Find the best way to turn an investor’s retirement savings into reliable income during retirement. There are many nuances to reaching this goal. Investors and advisers should consider taxes during decumulation, and find tax-optimized strategies for liquifying assets and taking withdrawals. 

Investors will also need to make some lifestyle choices. Spending as much as they did while working may not be sustainable during retirement. Retirees may have to look at their expenses to see where they can cut back to ensure that their retirement savings will last them to the end of their lives. 

Decumulation strategies help retirees determine what their regular income will be so they can budget their spending around it. By using tax-optimized strategies, retirees will have more in their savings and less paid in taxes.

How to Calculate a Decumulation Withdrawal Rate

The decumulation withdrawal rate may vary based on the amount of savings, other streams of income and expenses. The general rule of thumb is to withdraw 4% of your retirement savings annually, though some professionals may say this percentage should be lower. This rule is not law and should only be used as a starting point to determine a retiree’s withdrawal rate.

When calculating withdrawal rates, retirees should take into account inflation, the growth of their savings and their expenses. Retirees will want to optimize their Social Security and pension payouts and use retirement savings to supplement that income. Generally, retirement income should be at least 80% of the retiree’s income before retirement.

It’s important to determine a withdrawal rate to help with retirement spending strategies. If retirees know how much income they will be getting monthly, they can structure their bills and other expenses to ensure they can continue to live comfortably. Knowing this number also gives retirees the peace of mind that their savings will last them as long as they need. For help determining a withdrawal rate, check out Retirable’s income calculator.

Example of Decumulation Strategy

So what does this look like in action? Say a retiree has saved $800,000 in retirement. Before retirement, this retiree was making $80,000. The average Social Security check in May 2022 was $1,668. Eighty percent of this retiree's income would be $64,000 annually. Social Security will make up about $20,000 of this income, so retirement savings will have to account for the other $44,000.

$44,000/$800,000 = 5.5%

This withdrawal rate is a little more than the 4% rule of thumb. At this rate, retirement savings will last about 18 years, not taking inflation or unexpected costs into consideration. But retirees may need to consider other income sources, such as real estate, a pension or a part-time job as well as their spouse's retirement income. 

Deciding on the Best Decumulation Strategy for You

Many things should be considered when determining decumulation strategies, such as lifestyle, taxes and healthcare costs.

Consider What Type of Lifestyle You Want to Live

The biggest decision retirees need to make during decumulation is the lifestyle they want to lead. Will their current lifestyle remain sustainable? Does the retiree want to continue working a part-time job? Do they plan or pursue expensive hobbies or travel? Will they move or downsize their housing?

These questions and many more can help determine the lifestyle the retiree will have during retirement. Determining lifestyle is crucial because it helps retirees determine their retirement spending strategies. Of course, the fewer expenses they have, the longer their retirement income will last. The retiree also needs to feel happy and should enjoy their retirement as well.

Map Out Your Sources of Retirement Income

In the above decumulation strategy, only retirement savings and Social Security were taken into account. Many retirees may have other streams of income that can supplement savings. During decumulation, retirees should consider all of these sources. Do they own real estate property that provides income? Do they have other investment accounts or savings? All of these income sources can help boost income for a comfortable retirement.

Know Your Withdrawal Options for Retirement Accounts

Every retirement account has different withdrawal options and tax structures. For example, Roth individual retirement accounts (IRAs) and 401(k)s will have tax-free withdrawals. Traditional 401(k)s and IRA withdrawals are subject to tax. Different investment accounts also have required minimum distributions, which you are required to take to avoid being subject to a tax penalty of 50% of the required distribution. Knowing the withdrawal options and limits of your accounts will help you determine tax strategies for retirement.

Look into Other Ways to Generate Income

To supplement retirement income, retirees can look for other income streams. This may include working part time, owning rental property or taking out a reverse mortgage. A reverse mortgage allows homeowners to take out a loan for the value of their home, and they are not required to pay it back during their lifetime. When the home is sold, the lender will get the amount of the loan back.

Reevaluate Your Risk Tolerance

If retirees had a more aggressive investing strategy during accumulation, they may want to reassess their investments during decumulation. Moving assets into more stable investments will slow growth, but it will also ensure the retiree doesn’t lose any of their savings. 

Take Healthcare Costs into Consideration

As people age, their healthcare costs typically increase. Retirees will probably need to sign up for Medicare, which is a monthly expense. But Medicare may not cover all of a retiree’s medical bills, so they will need to ensure they have enough to cover those when needed.

Create an Estate Plan

Decumulation and retirement is also a great time to ensure your assets are preserved for the next generation. If you have assets such as a house, savings or investments, retirement is a great time to draw up an estate plan and ensure those assets are passed along to family members.

Retire With Peace of Mind

Determining decumulation strategies may not be fun, but it’s crucial for financial stability during retirement. A retiree’s savings will need to provide monthly income to cover regular bills as well as unexpected expenses such as healthcare costs. Decumulation helps a retiree know how much to withdraw and when so that they can live comfortably with the peace of mind that their savings will continue to provide.

Frequently Asked Questions


What is a good monthly retirement income?


Monthly retirement income depends on how much income the retiree had before retiring. Typically retirement income should be 80% of a retiree’s preretirement income.


How do you optimize retirement withdrawals?


To optimize retirement withdrawals, a retiree should think about the taxes on their withdrawals and maximize income for Social Security and other sources.


What is accumulation and decumulation?


Accumulation is the process of building up retirement savings. Decumulation is the process of turning those savings into reliable income.