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Decumulation: It’s Like Investing, Only Harder

Decumulation: It’s Like Investing, Only Harder

April 01, 2022

“When the time comes to spend down your retirement assets, there’s no “magic formula.” However, common sense and flexibility, along with diligence, will go a long way toward helping you achieve your goals.” Jerry Yu

What percentage will you need to withdraw to make your retirement savings last longer?  If you’re like most people, you probably haven’t thought much about that.

Or, some of you might say, “4%” because your financial advisor told you about the so-called “4% Rule.” The “4% Rule” says that if you retire at 65, you should withdraw 4% of your assets in the first year of your retirement. After year one, you should increase that amount by the rate of inflation every year after that. For example, if you retire when you turn 65 with $1,000,000, you should withdrawal $40,000 in year 1, and, provided inflation is running at around 3%, – $42,400 in year two, and so on.

For a long time, the 4% Rule was promoted by retirement income specialists because it is easy to explain to clients and reasonably simple to implement. However, some economists feel that the 4% Rule should be revised to the 3% Rule given our current economic environment of lower bond yields and high stock valuations.

Nobel Prize winner and longtime Stanford University professor Dr. William Sharpe calls decumulation the “nastiest problem in finance.” Sharpe likens the complexities involved in spending down retirement savings to those encountered when you invest.

You must make tons of decisions, including how much risk you are willing to stomach. Do you need predictable, reliable income streams? Do you want to leave money for loved ones or have enough money to meet out-of-pocket medical expenses such as long-term care?

Numerous uncertainties compound the challenge of spending down so you will have enough money to last you the rest of your life. These variables include not knowing how long you will live, what the stock market will do when you retire, and the future inflation rate. There are thousands of possible paths. Discovering your ideal options, optimizing those choices in terms of asset allocation between bonds and equities, and deciding whether to use safe money products such as annuities and life insurance can be like making your way out of a dense jungle maze.

Could an annuity help?

Dr. Sharpe, Dr. Wade Pfau, and other highly-regarded financial experts believe that an annuity is an excellent cornerstone for a viable spend-down plan for many people. A properly selected and customized annuity creates a guaranteed income that you can’t outlive, grows steadily over time, buffers against market volatility, and can instill greater confidence if you feel the need for riskier investments.


Decumulation is the trickiest part of a person’s financial life. Figuring out how to spend your cash without running out of money before you die is not an exact science. Variables including longevity, inflation, and stock market ups and downs can make determining your ideal spend-down plan a stressful exercise. For some people, adding an annuity to their portfolio can lessen the pain.