How Do You Transition from Accumulation to Decumulation in a Financial Plan?
Navigating the shift from accumulation to decumulation is a pivotal moment in any financial journey. We sought the expertise of Wealth Managers and Financial Planners to share their strategies. From beginning planning early to conducting trial runs, explore how the experts guide their clients through this important transition.
- Start Planning 10 Years Ahead
- Visualize Expectations with Trial Run
- Reassess Goals and Align Investments
- Balance Needs with Sustainable Withdrawal Rates
Start Planning 10 Years Ahead
Transitioning from accumulation to decumulation for retirees is a process. I recommend pre-retirees start creating their retirement income plan approximately 10 years before retirement so we can maximize their plan and begin the education on retirement. As they move closer to that retirement date, we get really detailed about what retirement is going to look like and how we are going to cover their expenses. If they have started the planning early, much of the uncertainty has been avoided, and their mindset can make a smooth transition into the decumulation phase.
Visualize Expectations with Trial Run
One of the most difficult tasks as a financial planner is helping clients transition from the accumulation to the decumulation phase of their financial and retirement plans. By the time most Americans are about to retire, they have worked for over 40 years and know nothing more than what they've been told since day one: "save and invest." The idea of spending down what they've worked so hard to save over decades is a very difficult mental shift.
I like to do a 6-month trial run where we calculate their income sources (Social Security, pension income, rental income, portfolio withdrawals, etc.) and how much they will be expected to spend on day one of retirement. This exercise allows them to visualize and calculate their discretionary and non-discretionary spending expectations and to experience how it will feel and operate once they are no longer working and receiving a steady paycheck. I also like to set up their bank account(s) to mimic and make available precisely the amount of money they will have available to them on a monthly basis.
Finally, I like to run 10-year tax projections to show them how much they will likely be paying in taxes if they do nothing and some of the strategies we can utilize to minimize that amount over their retirement years, since taxes will likely be their largest expense in retirement.
Reassess Goals and Align Investments
Helping a client transition from the accumulation to the decumulation phase is a critical part of financial planning.
Here is how I'd take it: First, I reassess their financial goals and update their retirement income needs, considering any changes in lifestyle or expenses. We then review their investment portfolio to ensure it aligns with a more conservative risk tolerance suitable for generating income rather than growth. I also set up a withdrawal strategy, often using the bucket approach, which divides assets into short-term, medium-term, and long-term needs to optimize both security and growth. Additionally, I focus on tax-efficient withdrawal plans to minimize tax liabilities, making sure their income lasts throughout retirement. Regular check-ins are essential to adjust the plan as needed and ensure the client's financial security.
Balance Needs with Sustainable Withdrawal Rates
Transitioning from the accumulation to the decumulation phase is a critical juncture in a client's financial journey, and as a financial planner, I provide comprehensive support throughout this transition. I begin by conducting a thorough assessment of the client's retirement goals, income sources, and expenses. Together, we develop a tailored decumulation strategy that balances their lifestyle needs with sustainable withdrawal rates and tax-efficient distribution strategies. I also help clients navigate complex decisions such as Social Security claiming strategies, health care costs, and legacy planning to optimize their retirement income and preserve their wealth for the long term. Through ongoing monitoring and adjustments, I ensure that their financial plan remains aligned with their evolving needs and goals throughout retirement.
