Plan your retirement diligently in vacation planning

Retirement is a financial goal for everyone. An important feature of the event is that you move from planning, which requires saving, to living in retirement, which requires systematic spending of money. You go from accumulation to decumulation.

Retirement requires changing many patterns and the entire frame of reference. Change can be difficult to the point where some people are afraid to spend the money they’ve worked hard to save.

The decumulation phase of a person’s financial life can be a stressful event and it can last a long time. A study looked at how the financial services industry views and manages the transition to retirement and found that the industry was also struggling. The financial services industry has invested a lot of intellectual capital in helping people stay on track with saving for retirement, while neglecting the question of how people spend their savings in retirement.

Many articles deal with limits or guardrails to guide savers, but there is far less thought or advice for spenders. The likelihood of confusion, bad decisions, and other general incorrect choices only increases in the decumulation phase, but thoughtful advice or safeguards are rare.

Many large investment firms find that most of the money they invest is dedicated to retirement accounts, especially on its institutional platform for defined benefit and defined contribution plans. In fact, industry totals run into the trillions of dollars.

Slowly, the industry is beginning to think about its role in the process of disbursing retirees. I would say that the most interesting question for researchers and retirees concerns this strange word, decumulation.

Decumulation is the most efficient way to convert a traditional savings-focused portfolio into what is essentially a cash flow machine. The shift from saving to spending requires a change in the whole frame of reference. The portfolio is evolving from a means to create the greatest wealth, to a tool to provide predictable income each year throughout the retirement journey. Essentially, the retiree replaces the usual salary.

I would like to warn that the solution is not to hand over all of one’s savings to a company that promises a retirement salary, but rather to have a plan with flexibility and tools to allow the retiree to rely on cash flow , but also to adapt to the many curves and roundabouts that occur in life.

When comparing accumulation to decumulation, you should note insights from behavioral finance research. Savings are touted. Businesses and the financial industry have come up with effective nudges to help people stay on track with their retirement savings. Many of these incentives come directly from individuals’ paychecks in the form of employer-sponsored retirement plans, default investment options, auto-enrollment, as well as accelerated contribution options for older savers.

That’s not to say saving is easy. Other assorted risks exist on the side of decumulation. They include bad timing when a person retires, setting an inappropriate level of spending, bad timing of the start of social security benefits, sequence risks related to the timing of withdrawals from a retirement account, not to mention various tax issues.

Then there are also the risks that come with tumultuous times. And we are certainly in the midst of a series of global and local events that warrant the label tumultuous. Media hysteria can lead to emotional and incorrect decisions. Be careful and thoughtful.

Just like you plan a vacation, you need to plan for a major life event like retirement. Have a plan. Have a strategy. Have safeguards so that you don’t blindly embark on the great adventure of this next part of your life.

Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s degree in business administration from the University of California, Berkeley. Contact him by email at [email protected].


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