Are You Ready for Your Decumulation Phase?
November 3, 2023

We think about accumulation more than decumulation. We spend our 20s through our 60s working on savings and preparing to retire at some point far in the future. Whether it is learning a skill, attending college, or starting to fund our first retirement savings account. The idea of retirement is in the back of our mind. That part of life where we lay back and enjoy not having to get up and go to work is the goal, but it’s so far in the future… until it isn’t.


There has been a lot of research on how to save for retirement. One of the outcomes of that research was to change how we enroll in company-sponsored retirement plans. It used to be that you had to opt in, but now you have to opt out. This slight change increased the number of participants in employer plans. Another change was the creation of retirement-ready or target date investment options in employer plans. In 2023, about 59% of 401(k) plan assets are in target date funds.


With all the research around getting ready to retire, you think we could systematize it like we do ways to save for retirement. The number of questions that have to be considered are more complex than the questions about how much I save for retirement. Is it five percent of my income or ten percent of my income?


What the research has shown is that the decumulation phase is very personalized. The complexity of factors that need to be taken into consideration makes the decision more granular than general. Research has shown that most people take Social Security far too early. With one in three Americans claiming Social Security at age 62. Do most of them realize that they are leaving money on the table by claiming early? Over my career, I have advised a handful of clients to claim at 62 because of health concerns. Other than those few exceptions, I advise clients to hold off and wait for the larger check. Once you start receiving social security, you are locked into an income stream that should last a lifetime.


So why do people take social security at age 62? The research shows several factors contribute to the rationale of starting Social Security at age 62, but the most common four responses I hear are:

  1.  I better start taking Social Security before it goes away
  2. I can receive the checks now and save the money. Think how much I will have!
  3. All my friends have signed up at 62, so why shouldn’t I?
  4. I can work less and get the same income once I sign up.

Response 1: Better start taking it before it goes away. Social security does not look like it will go away. We could experience a change like we did back in 1983. That is when the full retirement age moved from 65 to 67. But it would be political suicide to take it away. In 2023 an average of 67 million Americans per month will receive a Social Security check. That is nearly 9 out of 10 people over 65 who are receiving a Social Security check. About 40.2% of Americans’ only income in retirement is from Social Security.


Response 2: I can receive the money now and save it. Do you know the rate of return you will need to earn to offset the increases you will receive by just waiting? The average increase by waiting is around 8% a year. If you wait for the increase, it is factored into the system, so you need to worry about investment returns or market volatility. When you look at real numbers, for example, if you could receive $1,992 at age 62, then you could receive $2,856 at full retirement age of 67. That difference is $864 a month. If you decide to wait to age 70 for the max social security benefit, your monthly check could be $3,552 a month. (These are real numbers from a social security statement).


Response 3: All my friends have signed up. It might work in their situation. How will it impact your success of staying retired once you start? Until we do the analysis, we will not know what effect this very important choice will have on you. Once you start taking Social Security it is almost impossible to go back and change. You eventually get locked into a choice that was either well thought out or not. When you talk to retirees about Social Security selection in their 70’s or about a choice they made in their 60’s, you find that 19% regret starting early, according to the National Bureau of Economic Research.


Response 4: I can work less and get paid the same. Yes, you can, but if you earn too much you lose benefits. Will you need to work longer because your benefit was not enough to fully support your lifestyle at age 62? We break down retirement into three phases, Go Go, Slow Go, and No Go. During the Go Go phase, you may have the ability to go back to work if needed. The option of working becomes limited in the Slow Go and No Go phases. It is important to think about the long-term effects of locking in that income stream at 62.


When we work with clients on when to start receiving Social Security, some of the data we gather includes the following:

  1. Income sources in retirement (i.e., pension, required minimum distributions, Social Security)
  2. Cashflow requirements during retirement (i.e., cost of living, debt)
  3. Lifestyle needs (i.e., travel, major purchases, family)
  4. Savings to fund lifestyle (i.e., IRA, 401(k), 403(b), Roth IRA,)
  5. Long-term Care Plan

What the research has shown is that the decumulation phase is much more personalized than the accumulation phase. The questions about when to select social security or how/when to start taking distributions from your retirement accounts are very personalized. The number of questions that have to be considered are more complex and very personalized than how much I should save.

If you have questions about your own decumulation phase, we can help.


Schedule an introductory phone call with John at this link: John Simkins – Introductory Phone Call


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John Simkins

John Simkins
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