Decumulation Is Key To Your Dream Retirement

October 19, 2020

We have all heard of ‘accumulation’; literally defined as “the process of gradually increasing in amount”¹ which in this context, refers to your assets and wealth.

Sounds like the only keyword you need to know in your financial plan? Think again!

I would like to call your attention to another must-know verbiage that is lesser known but just as important – decumulation. Contrary to popular belief, decumulation is actually a word in the dictionary and is explained as the “disposal of something accumulated”². In the financial planning sense, it refers to the “de-accumulation of assets”, which can be understood as a step taken to sustain your desired retirement lifestyle.

Decumulation is much more complex than accumulation.

During the accumulation phase, you are advised to save consistently and invest efficiently. On many fronts these are almost automatic processes that do not really require creative thinking.

However when it comes to decumulating, you need to be smart about:

Ensuring you have sufficient retirement income to support your desired lifestyle;
Covering healthcare expenses and long-term care in the possibility of poor health;
Managing risk on other factors such as the rate of inflation and your longevity; and
Distributing your estate to the people and the causes you want to take care of.

In our professional capacities as financial services consultants, we have always been addressing our clients’ need for accumulation. The classic mantra is relatively easy: Earn more, spend less, and invest the rest. Yet, I find that not much has been done to advise how to monetise the assets built up over the years to create passive income. The safe and staid ways of utilising bond coupons or share dividends are great but most likely insufficient to meet the indeterminable factors of inflation and rising healthcare costs.

The quality of living for retirees are in turn affected, because they end up spending lesser than what they can due to fear of outliving their assets. Due to the lack of financial know-how, they struggle with having too little for themselves and may not enjoy their golden years to the fullest.