‘Decumulation’: The Problem May Be Even Tougher Than You Or Your Clients Understand

This article was originally posted on FinancialAdvisorIQ on October 10, 2017.

Helping preserve a client’s money in retirement is a tall order. We’re living longer and healthcare is getting more expensive. Meanwhile over-generous spending rates, market shocks and unseen personal emergencies can knock years off plans many of us are psychologically predisposed to sabotage at the best of times.

Last month, the Investment Management Consultants Association hosted a conference in Toronto focused on helping financial advisors develop technical strategies to help clients enjoy their wealth in the so-called decumulation stage — a task the association says is more daunting than the financial planning business generally realizes.

“Decumulation” is a made-up word coined to describe a process of sustained spending. It’s the opposite of saving or “accumulation” – a real word from the Latin verb “accumulare,” meaning to “heap up gradually.” Decumulation then refers to disposing of that which has been accumulated — which is, as speakers at the IMCA conference made clear, much easier said than done when you add in market forces, an uncertain timeline and the vagaries of happenstance.

And that’s to say nothing of the obstacles thrown up by our wayward brains.

“Decumulation goes against human preferences that have been programmed into us for 200,000 years at least,” says Daniel Crosby, a psychologist who heads Nocturne Capital, a new RIA in Atlanta. “That’s an operating system with no update in sight.”

As befits a species groomed for hand-to-mouth survival, losses feel more catastrophic than gains feel celebratory, and saving seems, well, like a fairly stupid strategy. As a nomadic hunter-gatherer, it makes sense to assemble the clan and eat all the berries on a bush there and then. Rationing the fruit for another time seems wasteful — especially when there might be a fat wildebeest around the next bend.

With this sort of brain tilt still in effect, advisors should keep discussions with clients as straightforward as possible, according to Crosby, one of the speakers at the IMCA conference in Toronto. Our prehistoric hardwiring means even the most sophisticated clients want three boxes checked when it comes to their money in retirement.


Jim Otar


“They want simplicity, safety and surety,” says Crosby.

Keeping things simple calls for an understanding of how averse we are to saving. Feelings of safety are enhanced when we acknowledge, openly and often, that losses hurt more than gains give pleasure. And a sense of surety is bolstered by the familiar.

In discussing, planning for and living through decumulation, FAs should be aware the whole process feels dangerous to most people, says Crosby. As hard as they had to work — not least physically — to set aside money for retirement, decumulation is harder for several reasons.

First, it feels like demolishing something that’s precious and hard won after decades of building. It also takes retirees from “partial to total reliance on markets” as they give up their day jobs. Finally, discussions of retirement spending and income preservation are closely linked to thoughts of our mortality – a notoriously touchy subject.

“A focus on death tends to bring out the worst in people,” says Crosby.

And if the fear of death along with feelings of loss and dependence don’t scare a particularly tough-minded retiree, the raw numbers maybe should, says Jim Otar, an engineer, financial planner and investment writer based in Toronto.

In Otar’s view, the size of the savings is less important than the rate at which the money is spent. If spending is below the rate of sustainability — and it should be every FAs priority to urge clients to keep it so — then “accumulation usually continues” in the underlying portfolio, he says.

Where it doesn’t — and for most retirees it can’t — then the gates are thrown open. In this case, says Otar, “concepts such as asset allocation, diversification and long-term horizons have little or no meaning.”

In other words, the question of whether a 65-year-old with $1 million can make it to 100 before he runs out of money is up in the air if he spends past the sustainable rate — no matter how he manages his portfolio.

“It doesn’t matter how you slice the pizza if there isn’t enough pizza in the first place,” says Otar, another speaker at the IMCA conference in September.

FA-IQ readers seem to agree with Otar on this point. Given four choices as to their client’s biggest challenges to retirement wealth preservation in a recent poll, readers made “overspending” the most popular choice, followed closely by fear they could outlive their money.

Investors who can’t spend at strictly sustainable rates should have drilled into their skulls the importance of prioritizing their outlay, says Otar. They should know what spending is essential for survival — food and shelter — what’s merely desired and what’s absolutely pie-in-the-sky.

Then they can dial in bond-and-equity ratios passed on prevailing price-to-earnings ratios to hit on asset mixes that, without guaranteeing a positive outcome, seem historically gauged to see the investor beyond the mortal realm before penury seeps in.

If that’s a bit stratospheric, other players are tackling the retirement puzzle in more prosaic ways.

RetireUp, a Libertyville, Ill.-based fintech firm that helps FAs have better retirement discussions with clients, and RepPro, a Southfield, Mich.-based company that processes online forms, have just rolled out RetireUpPro, a retirement income planning service for financial advisors. The place has a base price of $99 a month, and “Pro” and “Enterprise” versions at negotiable rates.

RepPro CEO Patrick Kelly says FAs with “a technology infrastructure in place that provides them with the efficiency, support and organization” have a distinct competitive advantage over advisors who are winging it when it comes to retirement conversations and follow-through.

For RetireUp’s president and sales chief Michael Roth, RetireUpPro is all about “making retirement planning understandable, accessible and personalized for the client” with a view to encouraging them “to take an active role in planning for their futures.”

Topics: Press