Decumulation in retirement: Smart strategies to make your savings last

Most people spend decades saving for retirement, focusing on long-term investments and other savings strategies. This is often referred to as the accumulation phase. 

However, when you enter retirement and stop working, you switch to decumulation. Decumulation in retirement refers to the phase of your financial life when you begin spending down on the savings and assets you’ve accumulated during your working years. Unlike the accumulation phase, where your aim is to grow your wealth, decumulation focuses on how to withdraw money strategically to support your lifestyle in retirement, while ensuring your money will last as long as you need it.

The decumulation phase may be demanding for many retirees as it comes with a variety of challenges, including stretching your retirement income, understanding tax liabilities, juggling risk management, and retirement withdrawal strategies. Because you will want to ensure you have a steady post-retirement cash flow while still making the most of your resources, it is crucial to approach decumulation strategically. 

The decumulation process involves deciding: 

• When and how much to withdraw from retirement accounts (like 401(k)s, IRAs, and Roth accounts) 

• Which accounts to tap into first (taxable vs. tax-deferred vs. tax-free)

• How to balance income needs, tax efficiency, and market risk (including sequence of returns risk — the risk of negative market returns that may occur in your late working years or early in retirement) 

You will also need to figure out how much you need to live comfortably during your retirement without depleting your resources too quickly. Considering these aspects in your approach to decumulation can help you plan strategically to ensure your needs and financial situation are in alignment.

Effective decumulation planning can help retirees avoid running out of money, minimize taxes, and maintain financial security throughout retirement. The best decumulation strategy for you will depend on your unique situation — based on your wants and needs during your retirement along with your financial situation. 

Here are some smart retirement decumulation strategies to help you manage income, taxes, and longevity risk:

A retirement withdrawal strategy is a planned approach for withdrawing money from your retirement savings accounts, including IRAs, 401(k)s, stock market investments, alternative investments, and any other retirement savings. A well-optimized withdrawal strategy helps make the most of your retirement savings by balancing income needs, tax efficiency, and market fluctuations.  

Commonly used strategies — explained more in detail in our retirement withdrawal strategies page — include the 4% rule, the bucket strategy, required minimum distributions, and dynamic withdrawals.

These strategies aim to balance your income, risks, and taxes to ensure your savings last you through retirement. Since everyone has a different financial situation, it is important to weigh different factors affecting your needs when planning your withdrawal strategy.

When designing a decumulation strategy, it is important to keep tax implications in mind. Tax-efficient methods can be used when planning your withdrawals to help mitigate tax liabilities during retirement.

A couple common strategies include:

• Tax-efficient withdrawal order: Withdraw from taxable accounts (brokerage) first, followed by tax-deferred accounts (traditional IRA, 401(k)), and finally tax-free accounts (Roth IRA, Roth 401(k)). This can help reduce long-term tax liability and keep your taxable income lower in early retirement years.

• Retired minimum distribution (RMD)-based strategies: RMD strategies, including early withdrawals, Roth conversions, donating RMDs, or purchasing annuities can help mitigate taxes on your RMDs. Often used in combination with other strategies, this can help you comply with tax rules while preserving portfolio longevity.

If you have lifetime income sources — income streams that are guaranteed for as long as you live — you might be more confident with spending your extra money throughout your retirement. Securing lifetime income sources can help you cover the cost of basic needs and things you need the most, while also ensuring you have post-retirement cash flow. 

Some examples include: 

• Social Security benefits: Social Security benefits provide income during retirement to help ensure financial stability. Delaying your benefits and working longer can help you maximize your Social Security benefits in retirement.

• Annuities: You can use a portion of your savings to purchase a deferred or immediate annuity that pays guaranteed income for life. This can help you cover fixed expenses and hedge against longevity risk.

If you have not started estate planning yet, now would be a good time to do so. Estate planning can help with decumulation if you are planning to leave part of your wealth to heirs. 

Utilizing strategies such as charitable gifting, gifting to heirs during your lifetime, or setting up a 529 plan for a grandchild’s college savings can help downsize your assets and minimize inheritance taxes as well. Trusts and other tools for legacy planning can also help ensure your assets are properly distributed and offer tax benefits as well. 

You will also want to ensure your estate plan is up-to-date, with the correct beneficiaries, heirs, and power of attorneys listed.

Once you’ve gotten through decumulation planning, you’ll want to stick to your plan for as long as it works. As you age and your priorities shift throughout your retirement, you will have to adjust your spending plan to meet your changing needs. You may also want to adjust your withdrawal rates based on changes in your financial situation, health, or market conditions.

A retirement financial advisor can help you rebalance your portfolio to help you manage any risk and maintain your asset allocation.

When planning your retirement decumulation strategy, it’s essential to consider more than just how much to withdraw. There are a number of common challenges retirees may face, which can affect overall retirement savings. 

Some key factors that can significantly influence the success and sustainability of your decumulation plan include: 

• Market volatility and sequence of returns risk: Early losses in retirement can dramatically impact long-term outcomes. Tailoring your withdrawal approach can help you continue growing certain investments while still ensuring you have income from other sources. 

• Healthcare and long-term care costs: As medical costs can increase with age, you may want to factor in supplemental insurance, out-of-pocket expenses, and potential long-term care costs. You will want to ensure your retirement savings can cover such expenses, or consider a health savings account or long-term care insurance.

• Inflation: Inflation can erode purchasing power over time, meaning you should plan for rising costs over a 20- to 30-year retirement. A retirement financial advisor can help manage your portfolio to ensure your growth assets outpace inflation. 

• Regulatory changes: Laws like the SECURE 2.0 Act can affect RMDs, Roth account rules, and inherited accounts. Ensure you are staying up-to-date and adjust your plan accordingly. 

• Longevity risk: You might live much longer than expected. While this is a good thing, many retirees underestimate this risk, therefore planning is crucial to ensure financial longevity. Options including annuities or delaying Social Security can help to hedge against outliving your money.

Transitioning from an accumulation mindset throughout your working years to decumulation in retirement takes strategic planning. To ensure you build the best strategy for you, consider what you need to cover your basic needs and meet your goals for retirement. You will also want to reevaluate your strategy as the years go by, to keep it in alignment with your current situation. 

If you are still in the accumulation phase, or simply want to supplement your retirement funds, Raisin is here to help. The Raisin marketplace gives you access to various high-yield savings products with competitive interest rates to make the most of your hard-earned money. Sign up today and start maximizing your savings potential!