From Accumulation to Decumulation: The Next Big Idea in Retirement Planning

Writing a lengthy magazine cover story about the so-called “decumulation” phase of retirement got me thinking about how important it is for my audience of expert advisers to view their mission from a more holistic standpoint. The same goes for government regulators. But it also got me thinking about how absurd our expectations for retirement readiness appear to be as a nation at the consumer level.

Typical 401(k) plan participants realize the lion’s share of their savings will come from workplace-based vehicles and so does management. It’s all part of a three-legged stool strategy involving pensions, personal savings from IRAs and similar plans, and Social Security, which these days will barely pay utility bills.

Much has been written about the importance of accumulating enough savings through one’s working years so that would-be retirees will not outlive their assets. The trouble is that we’re a nation of spenders – not savers. It’s embedded in our culture of conspicuous consumption. We’re also a nation of debtors. Case in point: some folks will take out a loan from their 401(k) plan. At least they’re paying themselves back.

But I digress. Here’s my larger point: Working Americans need a boatload of money to live comfortably in retirement. Figure, for the sake of argument, about $50,000 a year, which comes out to $1 million spread across a 20-year retirement. That’s a serious chunk of change.

One of the biggest unknowns is what a senior citizen’s health care costs will be. Medicare will cover only so much, and even with Medicare Part D prescription drug benefits, there are still significant out-of-pocket costs that must be factored into the mix. The most frightening scenarios involve some sort of nursing home or assisted-living care, which easily can impoverish someone at roughly $75,000 a year for a typical private facility.

So back to my story angle: Retirement plan advisers are being urged to focus a little less on the need for their customers to accumulate assets, which research suggests the Pension Protection Act of 2006 is helping to move the needle in terms of forcing people to save through various auto-pilot features. It’s now easier than ever to enroll in a savings plan at work, allocate a higher percentage of one’s income and choose appropriate investment options. That’s encouraging.

But now some forward-thinking industry leaders are saying the time has finally come for plan advisers, along with regulators, to put much more thought into helping people budget for expenses in their golden years once they stop saving by devising a household balance sheet of sorts.

The operative word being bandied about is decumulation. However, one of my sources suggests it’s the wrong description – one “that points to the investment past and not the retirement future… a word full of unexamined assumptions that we find strategically misleading.” He goes on to say that retirement isn’t about investment management so much as risk management.

Eventually the conversation turns to the use of annuities – the retirement equivalent of an allowance. Variable annuities in particular have been criticized for their high commissions, lack of liquidity and tax implications, especially from an estate-planning perspective. But there are products on the market with safeguards and design tweaks.

One telling anecdotal trend I’ve noticed where these plans are concerned is that almost no one who wins the lottery ever chooses this option. Instead, they want their winnings paid out in a lump sum, and sadly, many of those winners become losers when they blow all their money on big toys like fancy cars or boats, or share it with too many loved ones.

Which brings me to my conclusion: We all need to try much harder to save as much as possible for retirement and not rely on government assistance, which may or may not be there by the time we’re ready for a walker or golf course. We also need to do a much better job budgeting for expenses so that we don’t outlive our savings. And finally, we need to have much more realistic expectations about whether we’ll even be able to afford to retire, and if so, how long our savings might last.

With each generation, the definition of retirement seems to be changing and part-time work, at the very least, is now commonly seen as a fourth leg on that proverbial three-legged stool. A growing number of people tie their identity to a career and simply wouldn’t know what to do with themselves if they stopped working.

On the other side of the coin, many of us may have no choice but to continue working because we simply haven’t saved enough money. About 25 years ago when I first began writing about this topic on a regular basis, I often heard prognosticators say retirement would be the next savings-and-loan crisis. All these years later, I share those concerns. It’s a topic people don’t like to talk much about – just like their own mortality. And you can always take that to the bank.