Decumulation refers to the period in life when you shift from accumulating assets to relying on savings, investments and other retirement tools to provide you with income.
Our working lives are all about accumulating wealth in preparation for the time when we retire and we need that wealth to live on.
As people are living longer, retirements are extended and we could end up being retired for longer than our working lives.
A financial rule of thumb says retired people spend in an average week about 75% of what they spent before retirement. However, retirement now lasts long enough to be divided into multiple stages and spending differs a lot between each phase. You may also want to consider your 'legacy'. Do you want to leave anything behind for your whanau?
There are three stages of retirement most people typically experience:
You’ve done what you wanted to do. It’s time to kick back.
With luck on your side it’s time to really relax. During this stage your expenses typically reduce as you enjoy the simpler things in life. Your budget will depend on your healthcare needs and living expenses (for example, moving into aged-care facilities).
So what impact does this have your investment strategy before and during retirement? Pre retirement, when you’re in ‘accumulation mode’, investing is straight forward – your goal is to get maximum returns on all your investments and the focus is on acquiring assets.
When you’re ready to retire and start drawing down on your investments, a new strategy is required - commonly known as decumulation.
Decumulation investing, for the purpose of funding retirement income, is more complex than simply accumulating assets. As you’ll be needing a regular income from your investments, this impacts your investment choices. You’ll need to be investing in assets that can feed your income stream. A decumulation strategy therefore needs to consider which assets it needs to sell to fund the income you require, and which need to be kept to maintain value.
It’s really important to get good advice from an investment adviser or fund manager to ensure your investment portfolio is structured appropriately to support your retirement income requirements. For this advice, get in touch with an Financial Advice Provider. In the meantime, tools such as GoalsGetter provide you with the ability to monitor and adjust your investments over time, as your needs change.