Decumulation: The Wrong Name for Retirement Income Planning

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The twin goals in retirement income planning are usually said to be ONE: preparing for any desired bequests when a retiree dies and TWO: producing the maximum income for the retiree’s lifetime that is consistent with managing bequest needs.

An income may be produced by using an annuity or it may be generated through assets, such as mutual funds and securities. In keeping with its business model, Wall Street turned retirement income planning into an asset accumulation exercise. Indeed, accumulating assets has its place, but it has also become so instilled in the model that it is often forgotten why the assets are being accumulated. For instance, 91% of plan administrators view a 401(k) as a savings plan and not as a means to provide retirement income.1

Upon retirement, many retirees will need accumulated assets to address their income and bequest needs. Since Wall Street’s model during the working years was accumulation – the waxing of assets – they borrowed a word from econometrics and said that the goal in retirement was decumulation – the waning of assets. However, the goal for many retirees is not to get rid of their assets. Several retirees seek to achieve the combined goal of receiving the maximum income consistent with bequest needs. Calling retirement income planning “decumulation” incorrectly changes the focus from maximum income and bequests to efficient decumulation of assets.

Wall Street’s standard decumulation model is rarely efficient. The goal is to receive an income that lasts a lifetime. The decumulation model spends down assets and tries to time the retiree’s death with the day the assets run out. The spend down rate is calculated using a model, but this approach may not work in the real world. Since it’s based on a representation of the real world, the model is only right by accident. The spend down rate chosen is also affected by various cognitive biases, the chief of which is placing too heavy an emphasis on recent market history. The result of this is that the “correct” spend down rate has varied from 2% to 5% over the last decade, meaning the size of the accumulated asset pile needed for “decumulation” can vary by hundreds of thousands of dollars. In addition, the spend down rate is usually very conservative. This means that in most cases, the retiree will have taken far too little income over retirement.

Keep in mind that the other goal of retirement income planning typically is meeting bequest needs. (If a retiree does not have a bequest need, then the sole goal is generating the maximum income.) The Wall Street approach has the potential to provide strong bequests, but what is always unknown is the size of the bequest or the guarantee that there will be one at all.

The annuity and life insurance world directly addresses the goals of maximum income and bequests. In fact, when it comes to income, the use of deferred income annuities and deferred annuity guaranteed lifetime withdrawal benefits provides a direct income solution. Both can tell clients exactly how much their income will grow and how much it will be in retirement. And this income amount is not based on models, but on binding contracts. If there are bequest needs, life insurance can provide these without market risk or uncertainty – and at a known and predetermined cost.

Decumulation is both the wrong name and the wrong approach to use with retirement income planning because it describes getting rid of assets. Additionally, it has negative connotations, as many clients may associate decumulation with “losing” wealth. Planning for income and bequests may also involve spending down assets, but the goals are positive because they focus on producing income and new wealth. The decumulation approach is also inefficient because it doesn’t solve the problem of generating a predictable lifetime income or of creating desired minimum bequests. Annuities and life insurance do quite well in addressing these two goals.

This is not to say that income annuity solutions and life insurance should always and only be used. Nor should we assume that Wall Street’s decumulation approach is always wrong. However, we can say that annuity and life insurance solutions should always be considered in retirement income planning because they may provide the most direct and efficient way to reach one’s retirement goals.


1 Steve Vernon. The Next Evolution in Defined Contribution Retirement Plan Design. Society of Actuaries Conference. Sept 2013.



Jack Marrion is president of Advantage Compendium Ltd providing research and consulting services to select financial companies. He has twice been asked to address the National Association of Insurance Commissioners on annuity issues, his insights on the annuity and retirement income world have appeared in hundreds of publications including Business Week, Kiplinger and The Wall Street Journal, and his research is frequently referenced by regulators.

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