This One Oversight Could Cost Retirees Their Nest Eggs. What Should You Do to Avoid It?

Most Americans spend a good portion of their adult lives accumulating money for retirement. Whether that means tucking extra into savings, contributing to a retirement plan, or buying a retirement annuity, the focus has always been on accumulation.

Less discussed is what happens once retirement rolls around and it's time to begin spending that money. How much should you spend each year? How do you know your retirement savings and investments will last throughout your life and you won't run out of money in the third or fourth quarter of the game?

That's where decumulation comes in. After years of accumulating, decumulation represents a new phase in life, a time when you get to spend the funds you've worked so hard to earn and invest.

After decades spent building a retirement fund, failing to plan a retirement withdrawal strategy could cost you your nest egg. Here's why.

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Potential cost of having no decumulation plan

No one can see the future or predict everything that will happen. However, there are risks inherent to entering retirement without a spending plan. For example:

• Longevity: It's easy to underestimate how long your savings must last. If you live longer than anyone in your family has ever lived or even longer than you expected, your funds could be exhausted early enough to leave you in financial hardship later in life.
• Inflation: It's a given that inflation frequently rises and sometimes falls. But over time, inflation can erode your purchasing power. If your withdrawal strategy fails to account for inflation, your nest egg might not sustain your lifestyle through the entirety of your retirement.
• Market volatility: Counting on a fixed withdrawal rate without adjusting for market performance can be downright risky. If the market underperforms and you withdraw the same amount as usual, more of the assets in your portfolio must be sold to come up with the money. And the more assets sold, the less you'll have invested to profit from as the market recovers.
• Healthcare: Unexpected medical expenses can arise, and it's no secret that healthcare costs in retirement can create a stranglehold on your budget, quickly draining your resources. Unless you plan for those (potential) expenses in advance, it's easy to find yourself robbing Peter to pay Paul.
• Tax implications: It's easy to overlook the role taxes play in retirement. Even if you're bringing in less money annually, chances are you'll be paying taxes on that money. Failing to devise a withdrawal plan to minimize taxes can be costly.
• Lifestyle choices: Barging into retirement without a spending plan is like diving into a lake without learning to swim. Things may turn out OK, or you may need to be rescued. After decades of struggling to put money away, there's a temptation to spend -- especially early in retirement.

Too few have a plan

Last year, the fintech company IRALOGIX surveyed American retirees, asking about their approaches to decumulation. The finding showed that many retirees fly by the seat of their pants when making retirement withdrawals.

Rather than entering retirement with a structured withdrawal plan, they take funds as needed. Of those surveyed, only about 25% reported using a systematic approach designed to make their money last.

Creating your plan

There's no one-size-fits-all solution for those wishing to withdraw and spend strategically. Instead, it depends on factors specific to you. Perhaps one of the reasons so few people plan for decumulation is that it can seem complicated. In the IRALOGIX survey, 32% of respondents said the biggest challenge in managing their retirement withdrawals was understanding all available options.

Now is an excellent time to consider meeting with a financial or retirement advisor who can help you cut through the clutter and devise a plan that works for you.

In the meantime, ask yourself the following questions:

• What are my retirement goals?
• How long can my retirement last?
• What will my income sources be, including guaranteed income and investment accounts, like taxable brokerage accounts and 401(k)s?
• What are my other assets, including royalties, rental property, real estate, and business income?

Knowing the answers to these questions can help streamline the planning process if you decide to work with a financial or retirement advisor.

The interesting thing about decumulation is that it's vitally important, yet you can't expect to get it 100% right. There will likely be times during retirement when the plan will need to be tweaked, and that's OK. You're on the right path, as long as you understand the mission is to ensure your money lasts the entirety of your lifetime.

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