Decumulation

During the accumulation phase, time works for you: new contributions buy more shares after a market fall, and a long horizon lets losses recover. Decumulation reverses the flow. Withdrawals sell shares at whatever price the market offers, so losses in the first years of retirement can shrink a portfolio for good, the problem known as sequence of returns risk.

You are also planning against an unknown finish line. A 2009 GAO report described the risk as two-sided: retirees who draw down too quickly can outlive their assets, while those who draw down too slowly cut their spending unnecessarily and leave more behind than they meant to. The first is longevity risk; the second is a quieter failure that no account statement shows. Inflation, taxes, health costs and, eventually, the loss of one spouse’s income add further moving parts.

A decumulation plan is a handful of connected choices rather than a single withdrawal rate. Each affects the others: claiming Social Security later means drawing more from savings in your 60s, and drawing on pre-tax accounts early can shrink required distributions later. Decide them together, write down the rule for each, and revisit them every year as markets, tax law, health and family circumstances change, because a plan that settles only the withdrawal rate tends to fail on one of the other choices.

Most strategies fall into two families. Fixed-spending approaches, such as the 4% rule, set a starting withdrawal and raise it with inflation, which keeps income predictable but leaves the portfolio to absorb every market shock. Flexible approaches tie each year’s withdrawal to the portfolio’s value, which protects the savings but makes income vary; dynamic spending compares those rules one by one. Many retirees combine a guaranteed income floor from Social Security, pensions or annuities for essential costs with flexible withdrawals for the rest, and some hold near-term spending apart in a bucket strategy.

In a 2011 GAO report, the financial experts GAO interviewed typically recommended that pairing: draw savings down at a systematic rate, convert a portion into an income annuity to cover necessary expenses, and keep some money liquid for shocks such as high medical costs. The table below sets the main approaches side by side.

The tax code builds in its own decumulation schedule. Required minimum distributions from traditional IRAs and most workplace plans start at 73 for most people born 1951–1959 and at 75 for those born in 1960 or later, though a workplace plan can wait until you retire if you still work there and do not own 5% of the employer. The first one can wait until April 1 of the following year, but then two fall in the same year. Missing an RMD triggers a 25% excise tax on the shortfall, cut to 10% if corrected within two years. Roth IRAs, and since 2024 Roth 401(k) and 403(b) accounts, have no RMDs during the owner’s lifetime.

Other ages matter too. Withdrawals from IRAs and workplace plans before 59½ generally add a 10% additional tax unless an exception applies. Social Security can start at 62, at 70% of the full benefit when full retirement age is 67, or grow to 124% by waiting until 70. From age 70½, a qualified charitable distribution of up to $111,000 in 2026 can go straight from an IRA to charity and count toward that year’s RMD.

Research suggests many retirees decumulate more slowly than simple models predict. Work by economists James Poterba, Steven Venti and David Wise, summarized by the NBER, found that retired singles and couples who did not go through a death or divorce tended to have constant or slightly rising assets, and that many held on to home equity as reserve wealth until a spouse died or someone entered a nursing home. A Federal Reserve study of Health and Retirement Study data found that the median household’s wealth declined more slowly than its remaining life expectancy.

Some of that caution is sensible: late-life health costs are uncertain, and many people want to leave something behind. But it also means some households give up spending they could have afforded, the under-spending half of the GAO warning. Planning to spend at a steady, sustainable pace, rather than only guarding against running out, is the idea behind consumption smoothing.