More Money: Same Problems
Risk-facing retirees are universal regardless of wealth
Is there a certain level of wealth that confidently removes financial concerns in retirement?
Not quite.
More wealth often means more complexity, more taxes, more maintenance, more advisors, more fees, and overall, more hassle.
Although the aforementioned items can be cumbersome to deal with, they are manageable. However, one set of risks do emerge in retirement which are universal in nature no matter the level of affluence. These risks can ensnare even the wealthiest.
We like to think of these as decumulation risks.
Decumulation is the opposite of accumulation. It is the process of drawing down your wealth over time. You’ve saved a finite amount, and now you want to spend it while ensuring it lasts.
Wealth is somewhat relative to your spending habits. Typically, the more money you have, the more money you spend. This ratio of spending vs. the size of your nest egg can be described as a withdrawal or demand ratio. It doesn’t matter how much wealth you have; what matters is how much demand you will place on that wealth over time.
For example, if you have $5,000,000 in investment assets but plan to withdraw 10% per year, it’s the 10% withdrawal rate that is consequential, not the $5,000,0000 balance. Nothing magical happens with a large investment portfolio; you are subject to the same mathematics, risks, and uncertainties as everyone else. Stress the assets too much or for too long and at the wrong time and you could set off an irreversible decline.
The demand rate you place on your assets matters more than the total asset value. Understanding and monitoring this over time is an important part of managing decumulation risk.
So, what is decumulation risk? I think of it as the interplay of three related but independent factors:
Longevity Risk – How long will you live and need income from your assets? If longevity is in the cards for you, you may have a planning timeline 10+ years above the average!
Sequence Risk – What if you’re unlucky and your assets experience several years of negative returns in early retirement? A poor sequence can set the portfolio on an irrecoverable downward path, and you won’t have the luxury of waiting out a recovery because you need retirement income!
Inflation Risk – How are economic factors going to personally impact you over time? Can your assets support increases in withdrawals over time?
Decumulation risk is not a solvable equation because the variables are unknowable and constantly changing. It can only be addressed with probability-based planning and ongoing reviews.
Proper decumulation planning should address the following:
What am I planning on spending in retirement?
Where is that income coming from every year and why?
What is the average projected demand rate over time, and is it reasonable?
Do I have the capacity and willingness to adjust spending in response to market events?
To summarize, it’s not what you have but how you plan to use it.
This information has been prepared by Joe Basque, CFP®, CIM® who is a Wealth Advisor and Financial Planner for Westmount Wealth Management Inc. and an Insurance Advisor for Westmount Wealth Planning Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario, Canada. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc.
