By Dr. Jim Dahle, WCI FounderI'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
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.
- Figure out how much you need. It'll be something like 25 times what you spend.
- Make sure you have at least that much before you retire. Many will have much more.
- Start spending your money. This might be the hardest part.
- 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.
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:
- Charity? Don't convert.
- Your heir in a lower bracket? Don't convert.
- Your heir in a similar or higher bracket? Convert.
- You in a lower bracket? Don't convert.
- 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?
I chuckled when I read this post because it fit like a college T shirt on this 70 yo body . Eight months into retirement and have been living it up with friends and family. So far this year NYE in Paris, cruise to Madeira and the Canary Islands and just back from Scotland. Looked at the balances. Bottom line: I have more than I started the year with. Granted it’s been a good year in terms of sequence of returns risk but if this is anything like it’s going to be forget the spreadsheet for me!
Best article ever!
I loved this post. Honestly, I need to read it every month or so. “Hello, my name is Jon, and I am an optimizer.” Leaves almost no room for God if I try to control everything. Not just finances, but many facets of my life. Thanks for the topic. I have been part of the WCI community for a year, attended last February’s conference, and it has changed my life. This post just confirms it. Thanks again. Here’s to be satisfied.
I have been reading your blog posts and several others since before I retired 6 years ago. This post is the most practical financial advice I have read . I will save it to refer back to as a reminder whenever I get anxious if I am making the optimum decision. Thank you for simplifying the decumulation phase options.
I’m glad it was helpful. It’s the first in series aimed at people in or near retirement.
The 4% rule is generally based on Monte-Carlo modelling for sequence of return risk and typically the recommendation assumes that in less than 5% of the modelled outcomes you run out of money over a 30 year retirement period. While clearly running out of money is undesirable, the 95% of other outcomes will fall within the remainder of a roughly Bell-shaped distribution with the median often being an increase of 2-4x in the assets and the upper 5% an increase of 8-20x, depending on the rate of return and variance which are used. This is confirmed by the studies cited by Dr Dahle. To the extent that your 4% annual spending can be adjusted based on required vs. discretionary expenses, you can then manage the actual changes in the value of the asset portfolio.
“First spend everything you have to pay taxes on whether you spend it or not. ” Spend it whether or not you spend it? Please clarify.
Taxed whether or not you spend it, not spent whether or not you spent it. For example there’s no point reinvesting your incoming dividends that are taxed the year that you receive them then having to sell off shares (triggering additional capital gains taxes and trading costs) to cover your spending.
Exactly.
“First spend everything you have to pay taxes on , whether you spend it [that income] or not. ” Spend it whether or not you spend it? No, that sentence is not what is meant. What is meant is that you will be taxed on it whether or not you spend it.
IE don’t sell stocks for money and put your social security or RMD payments in the bank and ignore them, then complain about having to sell stocks while your bank account grows.
Exactly.
This post de-stressed me! Thank you for putting all the decumulation topics into one blog post. Although these topics are mentioned in many other blogs, it does get a bit confusing and stressful as we get closer to the end of work phase. I will save this one and come back to it. This post had me laughing throughout which made it even easier to read. Thank you for spending all the time and energy to write it. It will help many people.
Agree, bravo, and I know you wrote it before I filled out the retiree survey but it feels like a response to my survey comments on IRMAA Roth LTC and RMDs. You only missed inheritance issues in this post which aren’t strictly relevant to the topic anyway.
Here’s to chilling out my optimizing. And I actually said to myself earlier today “I’m not paying a lawyer or accountant $1000 to help me keep the IRS from getting $200 or so!”
So I’ll acknowledge that optimizing is a hobby and quit insisting that poor beleaguered spouse buy in to the minutiae of decisions I might choose to waste my time making.
” No, if you retire at age 65, you’re probably not even going to make it 20 years.” You “youngsters” might want to think about this when you decide how long to work. Not meant to be a downer, just a fact one realizes as you get closer to it!
Thanks, Dr. Dahle – I liked the article a lot. The only thing that I somewhat disagree with is the point that if a person retires at 65 he/she will probably not make it 20 years. The life expectancy of a 65 year old male is age 83 (which is only 18 years from 65) but roughly half will live longer than that. The life expectancy of a 65 year old female is about 85 (or 20 years from 65) but again, roughly half will live longer than that. But more importantly, the joint life expectancy of a married couple aged 65 is noticeably more than 85, with almost a 50% probability that at least one of the couple will make it to 90 and about a 20% probability that one of the couple will make it to 95. Thus, I would not be cavalier about only needing 20 years or less of retirement income (from age 65).
My father died at 84 but my mom (who is 2 years younger than my father) is now 92 and has outlived my father by 10 years. I expect that she will probably live at least another couple of years. My father-in-law died at 84 but my mother-in-law (who is 2+ years younger than my FIL) is now 84 and still going strong, probably with another 5-10 years left.
The reality is that for a couple who are in reasonably good health, they should plan on their money lasting at least until the younger one is 95. On the other hand, most WCI readers should be able to accumulate a pretty significant nest egg by age 65 and should not need to worry about running out of money.
So you agree with me that most won’t make it 20 years from 65, you just don’t like me using the word “probably”? I didn’t say just plan for 20 years, I said you probably won’t make 85, which is absolutely true.
No, I don’t agree that “most won’t make it 20 years from 65”. Overall, about 50% of all 65 year olds will make it to 85 or beyond, so “most” will not die before 85. If you are thinking only about single males then yes, I agree that probably less than 50% of single males will make it to 85 or beyond. But for females, there is currently about a 55% probability that they will make it past 85. I think the bigger issue is that, at least for couples, there is a rather high probability that at least one of them will last much longer than 85 (the joint probability is higher than the individual probabilities), so the money needs to survive until the last-to-die person passes. Any improvements in medical care and longevity will make it even more imperative that the couple plan for their money to last to 95+. So there needs to be more nuance in how you state that “if you retire at age 65, you’re probably not even going to make it 20 years.” For single males or people in poor health that is probably a correct statement. For females or couples in good health that is probably incorrect and a dangerous premise on which to base their financial plans.
That nuance is found in the rest of the article. The article doesn’t say your money must only last 20 years. But it certainly need last no longer than that for many people.
Great post! Part time in early 60’s, 3-5 big trips a year and all flying business class. Spending and loving it!!
I am in the first year of retirement and this post certainly cheered me up. It is a good summary of many thoughts previously posted at WCI about retirement. I think I need to print this and keep it in my written financial plan.
I had one possible suggestion: on the question of whether or not to convert to Roth, if the heir will be in a lower tax bracket but is disabled (drawing SSI or SSDI) it still might make sense to convert, as they can make use of the “stretch” IRA distribution period, which was changed for everyone else by Secure 2.0.
You can stretch a traditional IRA just as well as a Roth one.
True, but the benefit of stretching a Roth IRA over a lifetime of tax free growth can be huge to your disabled beneficiaries and they’ll never have to pay taxes on that money. Unlike with traditional IRA.
Maybe. Or maybe they’d be better off with a larger traditional IRA than one that lost 45% of its value when you paid taxes on it. Gotta run the numbers.
Dr. Dahle, this was one of the best posts I’ve read on the topic of retirement decumulation, and trust me, I’ve read a lot of them. I admit this article was written specifically for folks like me. I am a financial do-it-yourselfer optimizer type who has enjoyed the hobby of personal finance for years. I have been retired from medicine for 4 1/2 years and can attest to the fact that people like me really do struggle with spending, when you’ve spent most of your adult life accumulating what you hope is enough. Seeing your accounts go down is uncomfortable, knowing that they will never be as high as when you retire, but the truth is, our net worth has gone up substantially despite not having an earned income since retirement.
By all measures my wife and I are more than fine. We have a net worth north of 8 figures, but all I can see is the government owning 25% of my pre-tax retirement accounts, so the glass being half empty. Last year we finally got our estate plan in place and this led to cashing in some of both our taxable and pre-tax accounts, taxes and IRMAA be damned. We gave all 4 kids the maximum amounts not subject to gift tax, funded all 8 grandkids’ 529 accounts, set up a donor advised fund, and our account balances have still grown despite this. At least it’s a start.
This is clearly a psychological thing that many successful retirees struggle with. A lot has to do with the unknown or unknowable – how much time do you have?, how long will you or your spouse live?, what if I get sick?, what will my investment returns be?, and what if there’s financial armageddon? (then it probably doesn’t matter, does it). Anyhow, it was great to be reminded of how silly some of ridiculous discussions are that argue about trivial things like – Is 3.5% or 3.4% the correct withdrawal rate? or whining about having to pay taxes on RMD’s when you forget to mention that you didn’t have to pay taxes when you funded your account years ago in the first place.
It’s a good reminder that if you’ve worked hard and attained a level of success that most American’s will never experience, that you are blessed and you should enjoy some of the fruits of you years of hard work and saving, as well share your good fortune with others. It’s still difficult psychologically, but thanks for the reminder. For us optimizers, it will always be a work in progress.
Thanks,
– Dr. Scott
Thanks for sharing. Taxation of 25% and keeping 75% is more than “half full”—wealthy persons have a lot of investment options with low taxes so paying taxes on retirement distributions with deferred taxes keeps our country afloat.
Glad to be of service. It’s for me just as much as you.
Fabulous article and finally, people are talking about decumulation. When I retired 8 years ago there was very little information about it. Virtually all financial advisors and resources had no interest in decumulation – only accumulation and the higher the amount the higher their AUM fees. However, there will always be a lot of anxiety about decumulation for at least 3 reasons. 1) the future is unknowable so you can’t find a “magic number” -you have to over save, 2) inflation is cruel especially as regards health care expenses (7-8% annually?), and 3) the risk of a multi-year incapacity is real and, in some ways, worse than dying from a financial viewpoint. Guess, optimizers tend to be worriers….
thanks for a great article that is spot-on
Nest egg, meticulously built, untouched in fear – Resist.
Best from White Coat Investor yet 👍
great post Jim! I think also decumulation is scary because it is sort of the unknown part of our financial lives were as we have years to get used to being an accumulator. also the stories of people that have to work and can’t retire have more salience in our brains. You’re definitely right that me and other people don’t at first realize that is was people’s problems during the accumulation phase that causes to have a poor retirement, not their failure in decumulation.
Accumulation (more of it) would solve many decumulation problems. However planning decumulation rather than stumbling through it would also help. A family member has spent all their SS income regularly and tapped their pension savings whenever long before RMDs.
Urged to annuitize especially as their second spouse is 20 years younger they resisted untill urged by their pension plan and step kids as they reached 80. Knowing their spending history and hoping to be gone by 90 they took a 10 year then done payout rather than dual life span. So younger wife faces drop to SS for one on his death and drop to SS (for two) alone while he survives next year. He might feel this relative poverty is the price for having felt unable to tell her “we can’t afford this” (and act on that) throughout the marriage.
Children of first marriage gave up giving him financial advice decades ago and swore to each other not to give them money. They now pity (Step) Children of current marriage trying to keep the couple solvent. At least, raised by their stepdad, they are willing to include both parents in the stern money talk whereas older kids rightly didn’t tell second wife what to do, plus the younger children received some of the benefits of the overspending.
I think one of the concerns is how much “flexibility” will get you. Big ERN claims that you may have to reduce your spending by a lot (like 50%) for many years in some circumstances. And, in most cases, it would have been unnecessary- the market recovers and you do fine. But that’s impossible to know a priori.
I also think the ending up with 2.7 your starting investment is in nominal dollars, not real. So, after inflation, I expect it will be less effectively.
Those of us with a longer _potential_ retirement timeline have more to worry about. I may not live 5 years after retiring at 47, but the social security office thinks our combined longevity is in our 90s. That’s 45 years to plan for, not 30, which introduces more uncertainty.
Finally, if you retire solely on the numbers (25x or 33x or whatever), statistically you are likely to retire near the top of the market, so a poor sequence of returns is likely right around the corner. https://earlyretirementnow.com/2017/12/13/the-ultimate-guide-to-safe-withdrawal-rates-part-22-endogenous-retirement-timing/
This is an excellent reply and I would appreciate Dr Dahle addressing it , perhaps even as a follow up blog post or pod.
At minimum, nominal vs inflation corrected should be called out
It’s always best to think in terms of inflation adjusted numbers, it’s just the study I cited did the numbers in nominal terms. But the point was that people following the 4% rule were on average dying with more than they started with, not less. There’s an important message there.
Yes, his argument about adjustments having to be larger than many think is likely correct. That said, flexibility is extremely valuable.
Yes, you might need 45 years. But you don’t need 145 years and you probably don’t need 45 either.
The optimizers will need to find a new hobby besides reading and posting on bogleheads.
Never!😁😁
I can’t love this post enough. Like some of the other commenters, I need to read and re-read this every few months or so. I think I’m an optimizer in denial! Lol. Thanks Jim. You continue to be awesome. And I love the humor. I laughed out loud reading this.
Ha! I am funny to someone! Thanks for your kind words and glad the article was helpful.
Agreed!
I particularly loved “They just sit around and moan about RMDs and taxes and the current president for a while and then go take a nap.” 😂
When figuring retirement spending, look beyond what you are spending today. For example, consider the following:
– emergency fund
– current spending (Essential vs. Discretionary) Also include medicare, medicare supplement, and dental insurance
– living in place? then budget for home services at the age you think you’ll need it. These include housekeeping, lawn care, shrub pruning, tree trimming, snow removal, home maintenance, home delivery, driving to appointments, etc.
– home contingencies such as appliance replacement, HVAC replacement, roof, driveway, exterior/interior painting
– car upgrades (how will you pay for your next 2-3 cars?)
– healthcare (beyond health insurance)
– long term care
Are there any projects/trips you want to take? remodeling your home or moving? Selling a second home or property that could trigger large capital gains/IRMAA?
(Rereading this after link from recent blog) Agree Cheryl! I am gardening in a new to us home with a mind to “how much work will I want to/ be able to do on this garden in 5 10 15 years? Do I want to have to hire someone to do it? Will that even work if I want more than ‘mow the grass please’ ?” I try to get spouse to consider how long he will be boating or driving a sports car when he considers a purchase.
Being an optimizer, your comments were on target and helped to overcome some unintended worries. Here are my stressors in retirement that provides decumulation challenges. In retrospect building a career and raising a family seemed somewhat easier.
1. When your adult child suddenly is diagnosed with aggressive cancer. What will happen to the young teenager grandchild? Other health care retirees may face this sad situation that causes a rethinking of decumulation.
2. How much financial support is doable for two adult children who need help?
3. How much liquid money to have available for self funding LTC.
4. Should one move to another state to aid adult child with cancer.
5. Would our physical and mental faculties hold up to maintain independence…wife 78 and I’m 81? Our grandchild has few family members.
6. Will we able to fly or drive to help out or deal with own necessities?
These sample 6 questions illustrate why some have a harder time to spend during retirement.
As mentioned, your blog is excellent. Compared to building a career it seems the knowable and controllable challenges are much greater during the aging years. Perhaps that is why some of us have a harder time relaxing and spending some net worth. (I’m a retired university business professor and Bogelhead, not sure if I even qualify to post…if not just let me know and I will just read your excellent, wise, and insightful blogs). I don’t want to be presumptuous or violate your guidelines for posting if I’m not qualified. Thanks for your informative blogs.
Sorry to hear about your challenges. I certainly don’t mean to say there are no challenges in life after retirement.
Of course you’re welcome to comment and share your experience.
Via email:
Thanks for this great article! As a long time WCI follower who is still working but is considering early retirement around 2030, more information about the decumulation period is very much appreciated–even if Dr. Dahle feels like it’s the easy part. Thanks for all of the great information about the accumulation phase over the years. I know that you need to balance content for your entire audience (from med students to residents to beginning attendings to those considering retirement), but put one vote in for a small shift towards more articles like this one.
Thanks to all of you at WCI! WCI principles are the best prescription for burnout prevention–and the runner-up isn’t even close.
Via email:
Thanks for the blog post today on Fear of Decumulation Stage in Retirement. I last set the parking brake on the Boeing 777 2 years ago. I had the birthday cake with 65 candles, and at the end of the Happy Birthday song, I heard thanks, there is the door, thanks for playing. All good, knew the rules, as unfair as they may be, but adjusting to it well.
One area of adjustment that was significant, was the fear of going from accumulation to decumulation. Airline pilots are generally, but not always falling into the optimizer group, perfectionists. The brief before we execute, the debrief of every case of every flight in detail, what went well, what could have gone better and more importantly, why. So being a perfectionist, and losing everything you have done, and you’re right your identity over 4 – 5 decades does not happen overnight. I really like your principles, we would call them a checklist, and as it breaks down, and as we say compartmentalized, it makes it easier for optimizers to handle. I will pass this to my doc family members and wanted to say thanks even on the airline pilots side of the spectrum all this applies, maybe even more so, as you have to leave no later than 36 hours prior to that birthday cake.
I did a mini trial run of this in my thirties when I left the army. They put us through a class where the teacher pointed out “you will no longer be Major Jenn or SGT Smith!” I had a mini panic attack in the class and calmed down by telling myself “but I’ll still be Dr Jenn!” I have adjusted to being Grandma and Jenn a little better (but Mrs. husband’s last name/ not my last name still really irks).
Via email:
Having Just retired @ 60 years of age, I really appreciate this blog.
I wholeheartedly agree with your points, especially with every word written under section #1 (morbidity and mortality.)
Via email:
I am a longtime listener of the show and related WCI content (along with being a fellow Boglehead), and I must say this is one of the best blogs that I think you have written.
As someone who works as a professional in the wealth management industry, I have seen time and again how many retirees miss the forest for the trees when it comes to things like IRMAA and RMD’s. I found this article to be incredibly insightful and also with a very entertaining “tongue-in-cheek” overtone.
Thank you for all of the incredible work that you and the rest of the WCI team do. I have benefited enormously both personally and professionally from your content, and I consider you one of the most trustworthy and insightful authorities in the personal finance / investing world.
This is the singular best post I have read on overcoming the anxiety associated with early retirement. And I have probably read +1000 articles and blog posts on the topic over the past 5 years. Reality for HNW individuals is that the grim reaper is far more likely to get us before the poor house does. The irrational fear is a result of the fact that we’ve never done this retirement thing before, and we’re not the kind of people who like leaving anything up to chance, not to mention all the conflicting advice out there and the fear-mongering from the brokers, advisors and fin-fluencers.
Thank you!!!
Our pleasure. Glad it was helpful.
Question -Six years into retirement and re-assessing asset allocation.Im going back and forth on focusing on having 5 years of living expenses in cash OR 75/25% split-This “split “ leaves me with 9 years of living expenses -If i calculate 5 years of expenses I have 90/10 split-which seems a bit extreme -I’m 61-I know -spend more -We own beach house…?