TLDR: Decumulation in retirement is 10X harder than working/accumulation.
Is my thought valid? Could it be that the accumulation period ends (preferably) when you want it to end—when you have enough to leave your career? Decumulation is hard for so many reasons. They can be 1) you don’t know your end-of-plan date, 2) you don’t know your spending rate year-to-year, 3) you don’t know the inflation rate and pricing structure, and 4) you don’t know the tax rate and forced government payments.
I was thinking about this topic last night—or more specifically at 4:07am lying in bed. Wow, I thought, I have no idea—no real idea—of what lies ahead. This doesn’t keep me up at night, but it is one of those strange things I think about.
Inflation
There’s nothing worse for a retiree to see the price of a Big Mac in the 70s. That rate of inflation sends shivers down a retiree’s spine.
Strategy 1
One way to make this puzzle easier is to decide to leave as much of your net worth to others as possible. With this strategy, you may spend as little as possible, to leave the most possible.
Strategy 2
But, what if you want to do the other extreme and Die With Zero? What if you want to bounce your last check to the undertaker? This is an impossible task to time correctly. What’s worse, you can’t design a glide path down to nothing if you don’t know where/when the runway is located.
Other Strategies
Do you spend more upfront and then glide almost horizontally? Do you spend very, very carefully now/early and then have a giant dying party-not fun!
What if you’re an intelligent person and choose to balance spending now and spending in the future? How do you determine the timeline? How do you set up chapters of life/spending in retirement? If you fail at your plan of spending for enjoyment, where do your remaining resources go?
Taxes
Let’s say we want to optimize the amount of money we get to spend through our retirement life. Then we surely have to have the money to spend it—that means not letting it get away. This is where tax optimization, or at least a tax strategy is important. By paying our required tax amount each year and figuring out how to optimize that over our remaining/planned years.
Taxes are HARD in retirement. If you’re lucky your income levels will change over time, pensions, social security, profit-taking, etc. Bad things can happen too: inheritances, life insurance, etc. These “incomes” (inflows) may or may not be taxable. They often stack onto your income stack and push your income towards higher marginal tax rates.
Oh, but wait, it gets more complicated. These additional income types/categories may impact other charges (medicare, investment taxes) or subsidies (ACA, etc—I’m sure there will be more in the future i.e. renewable. etc).
Inflows
What about safety-first type inflows—a SPIA? It’s very nice to have an automated deposit each month. Is it worth the comfort of handing over a chunk of your money to an insurance company? Many studies seem to show you spend more comfortably when you have guaranteed payments coming in.
Enough already?
I don’t want to go into a lot of detail about what is going on in my head as I type this, but you get the idea—Money in retirement is much harder than when working/saving…and that was hard in itself.
I am not attempting to present answers today. I’m just sharing another random thought in my LifeInFIRE.
*** Nothing in this article is to be construed as financial advice. I am not a financial planner, nor do I pretend to be. You should always consult your own professional when seeking advice. This post is not a piece of literary mastery, just a random thought I had.