Andrew Juma

Decumulation Phase Of Retirement - How It Could Affect Your Budget Retirement is one of the most crucial phases of your life, and it is essential to plan and prepare for it. The right decisions can allow you to live comfortably and enjoy a financially secure retirement. On the other hand, the wrong choices may make you feel like you're living from one pension check to the next. The Decumulation Phase of Retirement is unique because it requires careful budgeting, smart decisions, and sound financial management skills. In this post, we’ll discuss the Decumulation Phase of Retirement and how it could affect your budget. Decumulation Phase vs. the Accumulation Phase An accumulation phase consists of strategies used by investors to gain or grow assets over an extended period to save and invest effectively. The decumulation phase of retirement is when you no longer work and draw down your retirement accounts towards zero. It can be a confusing period for many. Practically, this requires finding ways to utilize retirement assets in a way that ensures they last as long as possible. A common concern for many retirees is how to pay the bills once they stop working. Four primary sources can generate income in retirement. The largest contributor to all three wealth groups is Social Security. Labor, capital, and pensions will provide additional income for those who have them. You should consider how you plan on spending money post-retirement when you are creating your retirement savings strategy. Based on analyses From the 1990s to 2000s, there were many tailwinds for retirees and those planning for retirement, thereby reducing the need to draw down into retirement savings principal for a comfortable living standard. Future retirees might not have such a fortunate retirement. They may face multiple headwinds when they retire. They need to save even more and increase their overall savings. Several significant challenges are ahead, from increased taxes to reduced investment forecasts and taxable Social Security benefits. Tax and insurance considerations One of the primary considerations that should be made during the decumulation phase is insurance. IRMAA (Income-Related Monthly Adjustment Amount) adjusts the cost of Medicare Part B and D every month. It is a Medicare tax that stems from MAGI (Modified Adjusted Gross Income ) as determined by the government. If your income tax bracket rises higher by a dollar during decumulation, you could be thousands more in Medicare in the years that follow. Income taxes are another important consideration when drawing down your retirement accounts. You should understand what taxes will be due on various withdrawals and what tax-saving strategies may be available to you. For instance, if you have a Roth IRA, any qualified distributions are not taxable. Let's say have an income of $40,000 per year. At that point, you're in the 12% marginal tax bracket. Many people don't realize that if you were to make more than $40,125 (for example, if you withdraw from a retirement account), you would be subject to 22% tax, so it's essential to understand these rates and what they mean! Another concern is the Social Security Tax Torpedo. Social Security is not taxable for individuals with provisional income under $25,000 ($32,000 for couples). Social Security earnings are only taxable in ranges where provisional income reaches between $25,001-$34,000 ($32,001-44,000 for couples). What are some tips for managing your budget during the decumulation phase? When one enters into retirement, it is advisable to withdraw from the least flexible and least tax-efficient account(s) first to maximize their ability to defer taxes. Withdraw from your taxable accounts (TDAs ) first and save your tax-exempt accounts for later. Another tip is to create a basic financial plan to figure out if you have plenty of money to fund your retirement income in your estimated lifespan. Make sure to look at whether or not all of your assets are being allocated efficiently, as each account has its own purpose! If the numbers don't add up, consider directing surplus non-registered funds to practical uses (such as investing in a business). Tax-exempt life insurance is another solid decumulation plan. If you need your assets to pass to your loved one's after death, it will make sense to invest those highly taxable assets into a tax-exempt life insurance policy that the investment income could grow tax-free. It might be wise to think about gifting some of your assets now if you know you will need to provide funds to your low-income children in the future. Qualified charitable contributions can help avoid the IRMAA cliff. It is essential to know that there is no attribution of investment income earned from gifted funds when the beneficiary is 18 or older and thus legally independent. Thanks for your attention and interest. This post discussed the Decumulation Phase of Retirement and how it could affect your budget. Hopefully, that helps you plan well for your retirement. Sources https://www.forbes.com/sites/stephenchen/2019/09/30/why-decumulation-is-the-new-accumulation/ https://www.blackrock.com/us/individual/products/variable-insurance-funds/decumulation-challenges-and-potential-solutions https://www.intechopen.com/chapters/70904