Decumulation anxiety is something that many investors experience when they reach retirement age – which in itself is a significant period of change for anyone. It’s the fear of spending your retirement savings too quickly and running out of funds.
A lifetime of careful saving can result in a deeply held conviction to not spend more than we earn. It’s comforting to watch our nest eggs grow over the years through pensions or other investments, but when we begin the decumulation process, seeing our investments reduce can be anxiety inducing.
Often, clients will need greater encouragement to spend beyond their adviser simply pointing to the growth of their portfolio as justification for loosening the purse strings. A common question they ask is “what if I need it in the future?”. Whilst this is a sensible concern, it needs to be measured against the risk of not utilising investments at a sustainable level in order to enjoy retirement to the fullest.
Here’s a strategy to help cope with decumulation anxiety:
1. Have a financial plan
Working with a financial planner can help you to prioritise your needs and reduce decumulation anxiety. They can help you to figure out what you would like to leave to family and other beneficiaries, if anything, after you are gone. This may necessitate a family conversation around decumulation facilitated by an adviser to navigate. For example, deciding on the appropriateness of using the equity in your property for your own needs, rather than leaving it as an inheritance.
Cashflow modelling can be valuable for scenario analysis such as significant market movements or the need for long term care to incorporate some flexibility into your plan. Your planner can then assess a tax efficient ‘safe withdrawal rate’ from your investments, helping you to reduce the amount of decumulation anxiety you feel at retirement age.
2. Budget accordingly
Once you have your plan, you can budget your spending for the month and/or year. You could think of this as a target to meet if you find spending a struggle for emotional reasons or if you’re denying yourself things or experiences that would add value to your life. It can help to think about how you would live your life if money wasn’t a limiting factor. If there is really nothing more that you wish for, you could think of another use for your money like helping family or a charity that is important to you.
3. Reconcile your budget against your plan regularly
Regular reviews – at least annually – with your financial planner will assess whether you are on track with your financial plan and can provide the peace of mind to help avoid unnecessary decumulation anxiety. A plan should be flexible and adjusted if needed to take account of market performance, changes in legislation and personal circumstances such as health or new arrivals to the family.
4. Adjust your mindset
It’s important to note that new behaviour takes a while to become habit (studies say on average over two months.) This could take even longer if it’s changing a habit that has been held for years, such as switching from being a net saver to a net spender. Remind yourself regularly that not only are you allowed to spend your budgeting amount, but it is a part of your plan to do so. You’ve earnt this time to focus on and enjoy what is important to you beyond your career. As with any new habit it takes time, practice, and re-enforcement through repetition. Be patient with yourself and check in with your adviser if you ever need reassurance or a sounding board.
For some of us the instinct to spend will never be difficult to indulge, but for others, it is very common to feel some fear or anxiety over investment decumulation. It can be a valuable time to lean on your trusted adviser to overcome the emotional and mental adjustment needed to ensure you enjoy the retirement you have prepared for and deserve.
If you would like to speak to one of our advisers about your financial plan, please do get in touch.
