Navigating the decumulation stage of retirement investing

Managing your money in retirement is just as important as building it up, and there are different approaches you can take to help your savings support the lifestyle you want.

4 minute read

Once you hit retirement, it doesn’t mean your investment journey is over. In fact, managing your money in retirement can be just as important - and just as challenging - as building it up in the first place. This new phase, called the decumulation phase, is the period when retirees begin withdrawing money from their savings and investments to fund their lifestyle. How withdrawals are managed can have an impact on financial security in retirement.

Everyone’s situation will be different - there are no set rules on how to navigate decumulation. Below are some options to consider when thinking about how you might structure your investments in retirement.

The “bucket approach”

The idea behind the bucket approach is to divide the total retirement savings into different "buckets" (or smaller amounts) based on when the money will be needed. For example:

•    Short-term bucket: Could hold cash and low-risk investments (e.g. term deposits) to
      cover around 1 - 3 years of expenses.
•    Medium-term bucket: Could be invested in bonds and conservative investments that
      have a 4 – 10-year investment timeframe.
•    Longer-term bucket: This might include growth-oriented investments (e.g. shares)
      for future income beyond 10 years.

This approach can provide some peace of mind by ensuring cash is available for immediate expenses while allowing the remaining investments to potentially grow. It can also help reduce the risk that you might have to sell growth investments when the market is experiencing a downturn. This approach can involve a more hands-on style and regular reviews to keep things in balance.

Setting up regular withdrawals

With this approach, you could set up regular withdrawals from your investment accounts to help fund day-to-day living expenses. These withdrawals can be tailored to suit individual needs – either as a fixed dollar amount paid at regular intervals, or as a percentage of the overall investment balance. This allows for a steady income stream while leaving the remainder of your balance invested, potentially continuing to grow over time.  This approach gives you flexibility too, as the amount and frequency of withdrawals can often be adjusted to suit changing needs.

However, there are also some considerations. If markets decline and withdrawals continue at the same rate, it can reduce the length of time you expect the investment to last. Withdrawals that are too high may deplete the balance more quickly, so some people choose to review them regularly.

This approach could be paired with the bucket approach, setting up regular withdrawals from the short-term bucket and leaving the medium- and long-term buckets invested. 

The scheduled drawdown approach 

This is where you set up regular, planned withdrawals from your investment fund - much like receiving a paycheque in retirement. For example, if you retire at 65 and expect to live until 90, you could divide your total savings by 25 years to determine your annual withdrawal amount. This approach offers the reassurance of a steady income stream while keeping the remaining balance invested, with the potential to grow over time. 

It can provide structure and predictability, making it easier to budget for day-to-day expenses. However, because the schedule is set in advance, regular reviews can help check that withdrawals remain sustainable - especially during periods of market volatility or if your spending needs change. It also doesn’t account for unexpected expenses or any one-off big items that might need to be purchased.

Living off investment income

Some retirees choose to live off the income their investments generate while keeping their original investment untouched. This approach is often associated with larger investment balances and a diversified mix of income-producing assets, such as bonds, dividend-paying shares, and sometimes rental property.

While this approach can offer the comfort of a steady income and the potential to preserve capital for the long term, it’s not without its challenges. Income levels can fluctuate with market conditions - for example, dividends could be cut or rental income reduced. There’s also the risk that investment returns may not keep pace with inflation, gradually eroding spending power. Managing different types of investments can add some complexity, which is why some retirees choose to work with a financial adviser to help develop and manage their plan.

Choosing the right approach 

The right decumulation approach will differ for everyone, depending on factors such as:

• Risk tolerance – preference for guaranteed income versus investment flexibility.
• Health and life expectancy – whether funds are likely to last for the expected lifespan.
• Market conditions – how the strategy performs during periods of volatility.
• Lifestyle goals – such as travelling, supporting family, or leaving an inheritance.

Some retirees use a mix of approaches, for example, combining the bucket strategy with regular withdrawals, or pairing scheduled withdrawals for fixed expenses with living off investments for discretionary spending. Seeking advice from a financial adviser can be helpful in designing and maintaining your strategy. Professional support can help you feel more confident that your retirement strategy is on track.

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