Decumulation is all about spending your savings wisely so you don’t pass away with too much money. If you leave behind a lot of unspent wealth, it means all the effort you put into earning that money kind of went to waste. However, you also don’t want to spend it all too soon and run out before your time.
As we get older, our ability to earn money usually decreases due to declining health and energy, so it makes sense to have enough to cover end-of-life expenses without leaving too much behind. Ideally, we should aim for a steady spending rate throughout our lives, although as finance enthusiasts, many of us might end up working longer and saving more than necessary.
For me, decumulation is starting at age 45 this year, 2022. My thinking about life and money changed early on. When I was a kid, a tragic car accident took my friend, Mark. Since then, I’ve been driven by a mix of survivor’s guilt and a determination not to waste time, because Mark never got the chance to live his full life.
From a financial perspective, the markets have been kind since 2012, boosting my net worth despite having a family to support. Currently, our net worth is about 70 times our annual expenses. Even with healthy lifestyles, the chances of my spouse or I living past 110 are slim, making a strong case for starting to spend our savings now.
The median life expectancy hovering around age 80 suggests starting to spend your savings between ages 40 and 60. This timeframe allows you to enjoy your money when you’re still relatively healthy and can do things like travel or enjoy hobbies that might later become physically challenging.
Decumulating too early, say at 40, could be risky as it could mean planning for 40 years of expenses without income. Waiting until 60 reduces that period to about 20 years, making it a safer bet. Decumulating in this age range allows you to potentially enjoy your savings to the fullest.
Calculating the ideal time to start decumulating isn’t hard:
1. Decide on your retirement philosophy, whether it’s spending nearly all your wealth (YOLO) or leaving a legacy.
2. Subtract your age from 80 (or 70 for YOLO, 100 for legacy) to estimate how many years of expenses you need to cover.
3. Match this with your current savings rate. For instance, I’m leaning towards leaving a legacy, so at 45 years old, I plan for 45 more years. Our savings would last us 70 years, so we definitely need to start spending more.
Given that healthcare can be expensive as you age, it’s wise to have good insurance in place. We recently renewed our life insurance and felt more secure about our financial future.
If you’re trying to determine how much to decumulate, start by setting a goal for how much you want to leave behind, like for charity or family, and adjust your spending to hit that target. For example, if your savings and your lifespan calculations suggest you have excess wealth, adjust your yearly spending upwards to balance it out.
The idea is to modify your spending each year based on changes in your net worth and expenses. It’s like fine-tuning your finances to ensure you’re using your wealth to live well without leaving unnecessarily large sums behind.
Decumulation is more than a financial strategy; it’s about ensuring your money serves your life goals without leaving regrets or excessive wealth that could have enhanced your life or that of others. Whether it’s through strategic spending, investing in experiences, or donating to causes you care about, the goal is to use your wealth to enrich your life and others’.
