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By Dr. Jim Dahle, WCI Founder

I've noticed something really weird about experienced, successful investors. Most of them are a little intimidated by the decumulation phase. Anxious. Scared. Even terrified. I've spent a lot of time thinking about why and I still don't have it completely figured out, but I've got some ideas. Anytime one is feeling anxious or scared, I think it's worthwhile to verbalize the fear. Let's pull it out of the dark shadows in the corner, set it on the table in front of us, walk around it, and examine it. Amazingly, it won't seem quite so bad afterward.

 

Why Are People Scared About the Decumulation Phase?

First, let's define the decumulation phase. It's basically just retirement. You come out of school, start earning, start saving, and accumulate, accumulate, and accumulate. At some point, you realize you have enough, so you quit your job and retire. Voila! You're now in the decumulation stage. It's actually pretty poorly named. Most investors successful enough to build a nest egg large enough to retire on don't actually die with any less than they had on the eve of retirement. Studies of the 4% guideline suggest that, on average, a retiree has 2.7X the original nest egg at the end of a 30-year retirement. Actual results (as opposed to theory) are even more dramatic. Many people never live 30 years in retirement, and most retirees spend much less than they safely could. Maybe in real life, people are dying with 4X or 5X what they retired with.

At any rate, when you ask people why they fear the retirement years, they say “because it's harder and more complicated.” Well, I think they're wrong.

It's not harder. Have you been young? That's hard. You've got to compete and go to school for years and get good grades and live on ramen and deal with a psychotic boss. Then, kids start popping out and they've got medical problems and then they're teenagers and they have pimples and they wreck the car and you've got a mortgage and an SUV and a family that wants to go on vacation every year and you work 60 hours a week and you're supposed to save for retirement and college and . . . No. By comparison, retirement is easy. Your kids are out of the house. You no longer have a boss. You've paid for the house and cars. You go on a cruise every now and then, meet your friends for coffee, pick up your prescriptions, meet your friends for dinner at 3:30pm, and fall asleep watching the game that evening.

It's not more complicated, either. You've been investing now for decades. You've got it figured out. You're far more financially literate. You no longer have the alphabet soup of 401(k)s, 403(b)s, 457(b)s, and 401(a)s all with different contribution limits. You have a traditional IRA, a Roth IRA, and a taxable account. That's it. You don't have to make contributions every month. I manage my parents' portfolio in less than an hour a year. How hard can it be?

“But there's IRMAA and RMDs and Roth conversions and safe withdrawal rates to figure out!”

Really? That's your issue? So what if you pay a little extra in IRMAA? You're a multimillionaire. When you turn 75, spend your RMDs or give them to charity. Want to do a Roth conversion or two before you get to RMD age? Fine. If it's obviously a good idea, you'll probably be glad you did it. If you need a calculator to figure out if it's a good idea, it just doesn't matter much. And you don't need to figure out the safe withdrawal rate at the beginning because you're allowed to adjust as you go—just like you adjusted your spending to your income throughout your entire life. If you could handle your finances well enough to build a big nest egg, you're not going to blow it all in three years. There are almost 300 different formal portfolio withdrawal methods described in the literature and I'm still not convinced any of them are better than just eyeballing it as you go along.

No, I don't buy the “it's harder and more complicated” in retirement explanation. I think there's more to it. Here are the real reasons why people are anxious about the decumulation phase.

More information here:

A Framework for Thinking About Retirement Income

How to Spend in Retirement

7 Principles of Withdrawing Money in Retirement

How Flexible Might You Have to Be in Retirement?

 

#1 Morbidity and Mortality

I think people are just scared of getting sick and senile and dying. “But what if I live to 123 and run out of money?” Yeah, that's really likely. No, if you retire at age 65, you're probably not even going to make it 20 years. And you're not going to spend all that much from 75 to 83. If you had the financial literacy and financial discipline to save up a multimillion dollar nest egg, you're not going to run out of money. But that doesn't mean that the last chapter of life and the end of the book aren't scary.

 

#2 Some People Aren't Ready

Of course, lots of people didn't have the financial literacy, the financial discipline, and the income to save up a multimillion dollar nest egg. Or some bad things happened to them. They lost a job and were discriminated against. They were disabled or got divorced. They were scammed or got bad advice. Their spouse died. Their kids needed support well into their adult lives. Whatever. They're staring retirement age in the face, and they don't have enough money to make it through retirement. I totally understand why they're anxious. But that's not a decumulation problem. It's an accumulation problem. They screwed up accumulation, and there's only so much you can do in decumulation to make up for it. Like I said, accumulation is harder.

Despite the anxiety evident in many threads on the Bogleheads forum, people who save up a seven-figure portfolio over the course of a career (successful accumulators) don't run out of money in retirement. The same skills and attributes that helped them build that will ensure they adjust appropriately so they never run out. That's not necessarily the case for the average American. The average 401(k) balance at the time of retirement is in the low six figures. Now, if all you managed to save up for retirement was $150,000, you did better than the 40% of retirees living only on Social Security, but there's a pretty good chance you're going to join them. There is no fancy withdrawal technique you can employ in the decumulation phase that will somehow allow you to spend $40,000 each year from that little nest egg without ever running out. But again, that isn't a decumulation problem; it was an accumulation problem. Like I said, the accumulation phase is harder.

More information here:

Here’s How Much Money People Think They’ll Need to Retire – And Why Some Will Need to Work Forever

Paula Pant Asks: Do You Want to Retire or Are You Simply Tired?

 

#3 Optimizers Will Suffer from Anxiety

There are three types of people in the world: those who can do math and those who can't. But there are only two types of attitudes toward personal finance: satisficers and optimizers. Satisficers arrive at a point where it is “good enough.” They subscribe to the Pareto Principle, that you get 80% of the benefit from 20% of the work. Optimizers, however, are perfectionists. They want to get everything just right. They want to make all of their possible decisions correctly and leave every dime they can to their kids so their kids can fly first class even though they never did. Let's be honest, most of the people who write and read financial blogs are optimizers. It takes a great deal of training and discipline to get over that bad habit after decades of using it to build wealth.

The transition on the eve of retirement is particularly hard for these folks. They might think,

“Investment accounts are supposed to grow. Money is supposed to go into them. They're not supposed to shrink, and money certainly isn't supposed to come out of them. Plus I've got to navigate this huge existential crisis after losing my identity and the activities that have occupied most of my time for the last few decades all at the same time.”

It's supposed to be hard to spend your money. But it's mostly a behavioral problem that most people solve with behavioral solutions, like buying an immediate annuity or refocusing the portfolio toward income-producing investments even though they don't need them.

 

How to Do the Decumulation Phase

Let's break down the decumulation phase and make it so simple that it looks at least as easy as the accumulation phase.

  1. Figure out how much you need. It'll be something like 25 times what you spend.
  2. Make sure you have at least that much before you retire. Many will have much more.
  3. Start spending your money. This might be the hardest part.
  4. If you seem to be running out of money faster than you're running out of time, spend less and put some guarantees in place using insurance products.

Like I said, it's not that complicated—at least if you're not trying to optimize everything. Frankly, I think it's just way easier to earn a little more, save a little more, invest more efficiently, and work a little longer in the accumulation phase so you don't have to optimize the decumulation phase when your faculties might not be quite as good as they used to be. There's a reason that most people who run for president are over 75. Who else is senile enough to actually want that job?

More information here:

The Silliness of the Safe Withdrawal Rate Movement

How Much Will You Probably Die With?

 

You Don't Believe Me?

I've got you riled up now, haven't I?

“That blogger is wrong! It IS more complicated, I know it!”

OK, let's go through your issues one by one.

 

How Do I Transition My Portfolio to an Income-Producing One?

You don't. If you don't have enough income to just spend the income, then go ahead and sell a few shares, declaring your own dividend. As long as your entire portfolio isn't composed of illiquid real estate, that won't be an issue.

 

What Asset Allocation Should I Use?

Doesn't matter if it's 90/10, 60/40, 40/60, or 20/80. It's probably all fine. Look at the Trinity Study data.

How Much Can I Spend in Retirement

Look at the 3% column. Whether you were 100% stocks or 100% bonds, you were fine. Now, let's look at something a little less extreme. Let's compare 75/25 to 25/75. Let's look at a 6% withdrawal rate over 15 years. It's 97% vs. 99%. Same same. Didn't matter what your asset allocation was. How about a 4% withdrawal rate over 25 years? It's 100% vs 95%. Same same. Don't start thinking it's really going to make a difference if you choose 45% stocks or 55% stocks.

 

How Do I Figure Out IRMAA?

It's unbelievable how much the optimizers worry about IRMAA. You'd think it was a hurricane and not some tiny surcharge on your Medicare premiums. What's the very worst that IRMAA could be? Well, $560.50 – $164.90 = $395.60 per month. That's $4,747 per year or $9,494 per year for a married couple. That's as bad as it gets. And that's only for those with a MAGI in retirement of $500,000 or more. If $10,000 is the difference between you having enough and not having enough, you've got a real spending problem. If your MAGI is $500,000 a year, you're probably spending a million a year when you include the portion of SS that isn't taxable, Roth withdrawals, basis from your taxable account, rents sheltered by depreciation, etc. Don't let the IRMAA tail wag the retirement dog.

 

How Can I Make My RMDs Lower?

The fear of Required Minimum Distributions (RMDs) is even sillier than IRMAA. There are a lot of rich person problems out there, but the biggest one must be having RMDs that are “too large.” Funny that nobody ever complains about getting paid too much during the accumulation phase, but, all of a sudden, it's a big issue in the decumulation phase. Here's a tip for those whose RMDs are too big: give 60% of them to charity via Qualified Charitable Distributions (QCDs) or directly (and take a charitable deduction for it). You don't HAVE to pay taxes on income that you don't need if you give away the income. Seriously, though, if you don't want big RMDs, do big Roth conversions. But remember that almost all income that you eventually spend is going to be taxed at some point.

 

What Should I Do About Long-Term Care?

You pay for it. Same thing you do when you retire before 65 and need health insurance. Multimillionaires can afford to self-insure their long-term care needs. Everybody takes cash, and it's super flexible.

“But a nursing home could cost $100,000 a year, and I could be there for five years!”

Yup. And your spouse will still have $3 million after paying for it with that big fat nest egg you saved up during your successful accumulation phase. Do accumulation right, and decumulation can be incredibly simple.

 

Should I Do a Roth Conversion?

While the Roth vs. tax-deferred decision (and the related Roth conversions decision) is one of the most complicated things in personal finance, sometimes the Roth conversion decision is really easy. There are really only five choices. All you have to ask yourself is who is going to spend the money in your tax-deferred accounts:

  1. Charity? Don't convert.
  2. Your heir in a lower bracket? Don't convert.
  3. Your heir in a similar or higher bracket? Convert.
  4. You in a lower bracket? Don't convert.
  5. You in a similar or higher bracket? Convert.

If the decision isn't really easy (you're not sure if you'll be in a higher bracket), then it probably doesn't matter much whether you convert, so don't sweat it.

 

What's the Most I Can Spend Safely?

It depends on your definition of safely, but for a typical retiree, starting out at something around 4% and adjusting as you go is likely the best option. Flexibility is extremely valuable in this regard, so try to maximize your ratio of variable expenses to fixed expenses by eliminating debt and other mandatory payments.

There are countless “studies” that data mine a limited data set from the past that show one withdrawal method might allow one to spend a little more than another withdrawal method, but the general takeaway is that the variable methods (withdraw more when investments are doing well) are better than the fixed methods (take out the same amount every year no matter how the investments did).

 

What If I Screwed Up the Accumulation Phase?

What if you realize you want/need to spend more than your portfolio can provide? All hope is not lost. Through a combination of immediate annuities (SPIAs), delayed income annuities (DIAs, aka longevity insurance), and borrowing against assets you would otherwise leave to heirs (such as your home), you can spend more than 4% without having to worry about running out of money. Downsizing your home and moving to a lower-cost-of-living area (or even a foreign country) can be great options for those who want to retire but are nowhere close to having enough. Even if you don't do any of that stuff, you can see that 6% or even 8% still works a lot of the time, especially for typical retirement periods of 15-20 years. It might be a little risky, but some people prefer taking that risk in their no-go years to have a little more money to enjoy in their go-go years. Who can blame them?

 

When Should I Take Social Security?

This can be a complicated question, but like figuring out disability insurance during the accumulation phase, you only have to do it once. If you're healthy and single or the higher earner, the right answer is almost surely waiting until 70 to claim Social Security, even if it means spending a little more than 4% of your portfolio in the meantime. If you're not healthy or you're the lower earner in a couple, it can make sense to claim earlier than age 70.

 

What Accounts Should I Withdraw from First?

Like the Roth conversion question, the right answer to this depends on who is going to get whatever you leave behind and what tax bracket they're in. For example, if you're leaving everything to charity, you should spend your tax-deferred money last. If you're leaving everything to an heir who is in an even higher tax bracket than you, you should spend your Roth IRA money last. If there's a good chance you're going to die in the next five years, realizing capital gains in your taxable account probably isn't very wise. Better to take advantage of the step up in basis at death by spending from retirement accounts or even borrowing against the taxable assets. Non-governmental 457(b) accounts are often some of the first money tapped by retirees—even before taxable accounts—because as deferred compensation, that money is not truly yours and is subject to the creditors of your former employers.

This question gets way too much press in my opinion. Some recommend spending taxable, then tax-deferred, then Roth money. Others recommend a blended approach where you optimize your tax rate every year by getting right up to the top of your tax bracket. If both those approaches are reasonable, then so is everything in between. Which is pretty much everything.

However, the reality of retirement spending is that you should first spend everything you have to pay taxes on whether you spend it or not. This includes things like:

  • Social Security
  • Pension income
  • Interest
  • Qualified dividends
  • Capital gains distributions from mutual funds
  • Rents from investment properties
  • Required minimum distributions from tax-deferred accounts

Many retirees never even get through all that and, thus, aren't faced with the taxable vs. tax-deferred vs. Roth question at all. They just sit around and moan about RMDs and taxes and the current president for a while and then go take a nap.

 

What's the Best Way to Beat Sequence of Returns Risk?

This is another area with a fair amount of controversy. The main thing is simply to be aware that Sequence of Returns Risk (SORR) exists, and if it shows up in your life, you'll need to spend less in retirement. Having a very successful accumulation phase goes a long way to beating SORR. If you're so rich that you have a 2% withdrawal rate from your portfolio, SORR basically doesn't apply to you.

 

How Can I Spend More Money?

One of the biggest problems among retirees is that they don't spend nearly as much as they could. It's easy to recognize this in our parents or others but much harder in ourselves. One of the best ways is to set a spending budget that either must be spent or must be given away. However, there are lots of other techniques that can be used to increase thoughtful spending.

More information here:

25 Things You Must Do Before You Retire (and Here’s a Checklist to Help)

A New Way of Doing Business (and Saving Tons of Money) in My Retirement

 

The Bottom Line

The decumulation phase has a reputation for being super complicated, but I don't think that's really fair. It's really only hard if you did a lousy job during the accumulation phase or if you're a perfectionist. That said, the decumulation phase has lots of fun things in it that we can talk about and write about here at The White Coat Investor. Each of the questions above has at least one blog post (see the links) written about it on this site. And we will continue to write plenty more on these topics (especially if we can get retirees to give us the inside scoop on how they're doing the decumulation phase).

Get over your anxiety, recognize your mortality, do the accumulation phase right, and you won't HAVE to worry about money during your retirement years. You probably still will, though. Because you're human and that's part of the human experience.

What do you think? What big issues and questions in the decumulation phase do you have that weren't covered in this post? Do you think decumulation is harder than accumulation? Why or why not?