Crafting Your Decumulation Strategy

As you approach retirement, the focus of financial planning shifts gears. It's no longer just about accumulating assets; it's about making those assets last. This transition is pivotal yet often overlooked. However, it's not simply about the size of your nest egg but how wisely you manage it.

In this edition of Adviser Corner, Tom Pewtress, Head of Technical at Skybound Wealth explains how the way you decumulate your savings is just as important as accumulating it in the first place.

Two key concepts come into play here when considering your decumulation strategy; sequencing risk, and the impact of early retirement spending. Understanding these can make all the difference between a retirement of ease and one fraught with worry.

Decoding Sequencing Risk

Sequencing risk, or the risk that the timing of withdrawals from your retirement funds will negatively impact your overall portfolio's longevity, can be an issue for people in retirement. It's the danger that the market will take a downturn precisely when you start withdrawing funds. If significant losses were to occur early on, there's less capital in your portfolio to benefit from future market upswings, potentially putting your retirement plans in jeopardy.

The Consequences Of Early Retirement Expenditures

Retirement dreams often involve travel, hobbies, or home improvements, and fulfilling these ambitions can lead to larger expenditures early in retirement. Coupled with an adverse sequence of investment returns, this can accelerate the depletion of your savings. Understanding the balance between enjoying your retirement and preserving your wealth is crucial.

The Art Of A Comprehensive Decumulation Strategy

When the time does come to retire, it is important to ensure you have a strategy in place to mitigate the risks related to retirement withdrawals. This strategy needs to be multifaceted, focusing on tax efficiency, preserving investment growth, and ensuring ongoing cash flow.

Tax Efficiency Across Accounts

Where you withdraw money from first can have a big impact on how long your savings last. By being strategic about which accounts you tap into and when, you can minimise your tax burden and maximise growth potential.  For example, withdrawing from taxable accounts first can capitalise on lower tax rates on capital gains. Subsequently, tapping into tax-deferred accounts like retirement accounts and saving tax-free accounts last, allows for potentially tax-free growth to continue as long as possible.

Preserving Investment Growth

Intelligent withdrawal strategies can help mitigate sequencing risk by preserving the growth potential of your portfolio. This involves understanding market conditions and adjusting your withdrawal strategy accordingly, perhaps delaying withdrawals from certain accounts in a market downturn.

Ensuring Reliable Cash Flow

A successful decumulation strategy ensures that you have the funds needed to cover your living expenses, even in the face of larger early retirement expenses. This requires a deep understanding of your spending needs and a plan to meet them without compromising your portfolio's longevity.

Crafting Your Decumulation Strategy: A Step-By-Step Approach

Understanding your financial needs and wants helps in prioritising withdrawals so it's important to start with a detailed review of your anticipated retirement expenses.

• In-depth account review: Each retirement account has its own rules and tax implications. A thorough review helps in strategising the most beneficial withdrawal sequence.
• Strategic withdrawal planning: Developing a withdrawal plan that considers tax efficiency, market conditions, and your personal retirement goals is key. This may involve a mix of fixed and flexible withdrawals, adapting to changing circumstances.
• Flexibility is Key: The financial landscape and your personal circumstances change. Your strategy should be revisited and adjusted as needed to respond to these changes effectively.
• Professional insight: The complexities of managing retirement savings are vast. A financial planner can offer invaluable guidance, providing personalised strategies that consider all aspects of your financial picture.

Navigating the decumulation phase of retirement requires a careful balance between spending your savings and preserving your wealth. Understanding sequencing risk and the impact of early retirement expenditures is critical. By following a comprehensive decumulation strategy, you can ensure your savings support you throughout your retirement years. Partnering with a financial professional can further tailor this strategy to your unique situation, providing peace of mind and financial stability for your retirement.