First Person: Developing a Retirement 'Decumulation' Plan

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I've been planning for retirement since before I graduated from college. However, while I've been planning on how to save money, I haven't spent as much time considering how I'll spend it.

According to the article "How to Plan for Retirement's 'Decumulation' Dance", "How you spend your retirement accounts is as important as how you built them, and is subject to much the same forces that shaped your savings decisions: income, risk, and taxes. "You've got this dance between these three things," said Jennifer Landon, president of Journey Financial Services in Idaho Falls, Idaho."

The article goes on to note that "In any environment, retirement can be disorienting. "People accumulate money in these different buckets-IRAs, 401(k)s, Social Security, securities-but they don't know how to transition from saving mode to 'Boom, we're retired,'" said Bill Smith, president of W.A. Smith Financial Group, near Cleveland."

With my mother nearing her own retirement, I've been working on a "decumulation" plan for her, and in turn, considering how I'll eventually create my own plan.

Set returns

The first step in my decumulation plan involves the assets and income streams that will provide me with set returns. I start with things like Social Security, bonds, certificates of deposit, and savings. With exception to the Social Security trust fund beginning to run a shortfall in 2033, these are income streams with relatively stable returns and that can be counted upon each month for a set income. More than likely though, such items won't cover the full expense of retirement living and will need to be bolstered by other, possibly more unstable income streams. This is where the variable investment returns come into play.

The variable investments

The tricky part of developing a retirement decumulation plan involves determining just how much to pull from a retirement plan or plans like 401(k)s, 403(b)s, IRAs, and ROTH IRAs. Personally, I like to start by looking at annual returns for such investments, since I would prefer not to draw upon principal.

Take for example the DRIP -- or dividend reinvestment plan -- that I have in my personal IRA. This plan pays out monthly dividends that yield about 6 percent annually. The goal for my own retirement would be to focus on only drawing my retirement income based upon these monthly dividends, leaving the remainder of my share total in place to yield me those regular returns.

Factoring in taxes

I'll pay my fair share when it comes to taxes, but I'm not looking to pay more. To me, this becomes a sort of tightrope walking balancing act in retirement. We want to have enough money to live comfortably on, but not pull so much from retirement funds that we're paying excess taxes upon it.

In order to help my mother with this aspect of her retirement planning, I recently did a practice run of her estimated retirement tax returns. This way, not only could I see what her tax rate would be, but get a better idea of how much she should draw from her retirement account each year. I figure the first year or two of retirement will involve some adjustments regarding this amount along the way, but it gives us a better idea of what numbers she'll be need to hit and where to pull that money from.

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The author is not a licensed financial professional. Calculations have not been verified by a professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.


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