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Accumulating Income in the Decumulation Phase of Life: Retirement

Updated: Jul 14

Retirement is often called the “decumulation” phase, when retirees are steadily spending down their assets. However, many retirees are not only leaving their nest eggs intact but are also saving a large part of their income. Recent studies say that they’re accumulating assets as they move through retirement.

Kiplinger’s new article, “Shifting Gears from Saving to Spending in Retirement,” explains that it’s not just the wealthiest retirees who fall into this category. Retired households with at least $100,000 in financial assets save 31% of their income, on average, according to a recent study. A third of Americans age 65 and older took no retirement income from their nest eggs during the past five years, according to a 2015 study.

Saving money is good, but if you’re cutting out basic comforts because you think you’ll live to 108 and have huge medical expenses or because you worry that you won’t be able to leave an inheritance for your children, you might want to reconsider the severity of those risks and how you’re managing them.

On the other hand, if you’re on a cruise every other month and touring in a new Lamborghini but still spending less than your income, that’s a different issue. You should think about minimizing your tax liability as you continue to accumulate wealth throughout retirement. Also, keep reinvesting any extra income according to your goals, donate to charity or give away assets to family members.

Saving is becoming a bigger part of retirees’ financial plans, especially with defined-benefit pension plans going away. Retirees now must depend more on nonguaranteed sources of income—like 401(k)s and IRAs—to cover expenses. As a result of the greater uncertainty involved with generating income from stocks and bonds, retirees who draw their income largely from investment accounts tend to save more than those relying on guaranteed-income sources.

Many retirees say that saving is hardwired, but if you’re stuffing money under the mattress, think about how much retirement is really costing you and whether you’re saving up for future expenses that may never happen.

While many retirement-planning tools say that your spending will increase by the rate of inflation each year of retirement, recent research contends that this may overestimate retirement costs. In inflation-adjusted terms, spending actually decreases 1% annually in retirement. Major expenses, like a mortgage or the children’s college tuition, may go away in retirement. Also, you might spend less on big vacations and other active pursuits as you get older. So, the amount you must withdraw from your portfolio to cover expenses might significantly decrease during retirement.

Many retirees overestimate their spending needs. While optimistic, it might be a little unreasonable to plan on living to 110. You can look at a detailed calculator to factor in your health, family history and lifestyle to give you a better idea of your life expectancy.

A recent study found that the wealthiest 20% of retirees could safely draw down as much as 50% more than what they’re spending.

Reference: Kiplinger’s (August 2016) “Shifting Gears from Saving to Spending in Retirement”

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