the difference in investing during the accumulation stage vs decumulation stage (spouse, benefit)

[mathjak107]

i thought i would put a little summery together of many of the thoughts and ideas i have gathered up on the subject from the various sources i learn from..

this is peratining to those who are going to depend on their nest egg for their income.

a very important concept to understand is there are 2 very distinct phases of our investing lives.
its important to understand the 2 because the stratagy is different and the financial planners are usually different if you use one. most are great at the accumulation stage but suck at the decumulation stage.


in the accumulation stage we are growing our money. we are investing as aggressively as our stomachs allow . in the decumulation stage we are spending down our assets and creating an income stream.

now heres a very important concept. in the accumulation stage the rate of return we get each year isnt important . we can be up 50% one year ,down 20% the next ,up 20% the next etc.

what is important is the long term number in dollars and cents we get and not how volatile the road is to get there except the toll on our nerves.

if you averaged a 9 or 10% annual return the yearly dips and swings dont matter. you can be 100% in equities and the volatile swings at the end of the day were a moot point to your overall return. even the sequence

of those gains and losses dont matter. those sequences of losses and gains in the decumulation stage can spell death to a portfolio. thats why looking at a fund that has a 7% historical return and going that would be

perfect for retiring on, isnt true . that average return is fine in the accumulation stage but the sequence of those gains and losses are key to a retirement portfolio in the decumulation stage.


now when you reach the decumulation stage the rules and goals change. we are going from the stage where its all about growing richer to a stage thats all about not growing poorer and having our withdrawls last a life time.

very different rules and goals.

while 80-100% equities didnt matter in the accumulation stage it matters all to much in the decumulation stage.

once your spending down the plan is different.

if you still have those big peaks and valleys from a volatile portfolio as you are spending money it means if you have to re-balance in one of those valleys you have to sell more shares than rebalancing at the peaks to

get the same amount of money. read that sentance again ,its the big difference between the accumulating stage and the spending down or decumulation stage.

selling more shares kills the goose thats laying the golden egg.

so the decumulation strategy is making that portfolio as steady and less volatile as you can. the smaller the swings up and down the smaller the valleys.

your returns can be the same too, its just a steadier ride getting there .

as an example the mix i use of cash,stock,gold and bonds swings very little as somethings are always up and some things always down. ,my other portfolio i follow from fidelity insight has a smoother return as well but a lower return too.

the 9% return that the mix with the gold ,cash,bonds, stock has averaged is the same as the 9% return the s&p has averaged but the swings are way different.

the idea is to design a mix thats right for you and avoid being too volatile as a whole.

thats where bucket planning works well, thats where mixing in annuities helps smooth those valleys, thats where diversification of opposing asset classes work well.

its all a means to the same end. avoid big valleys in your overall portfolio if your spending down. the return you get year to year matters big time now unlike the accumulation stage.

tax planning becomes key here as well. you want to keep as much for yourself and less for the tax man.

that involves having the right assets in the right vehicles.

cash,cd's,bonds should be in the retirement accounts both roth and traditional.

equities should be in taxable accounts where they can benefit from 15% max capital gains taxes, write offs and passing tax free to heirs with a stepped up basis.

it involves using life insurance manipulation to take forever taxed money and making it never taxed for your spouse.

that decumulation stage is a real specialty and there are very few planners who are good at that 2nd phase.

read books and learn to get ideas and think outside the box as much as you can as you will get little help here from most pro's .

odds are you will be on the yoyo planning program at this stage "your on your own"

[mathjak107]

you have to look at the order you will be spending down in as well.

if all your equities are in your taxable account and arent spinning off much in

distributions you may want to hit other accounts for income first.

the 15% tax in the taxable account may be the better deal to hold on to.

if the valleys in your portfolio are steep you may be better off to spend tax defered money first thats taxed at regular income rates when it comes out.

traditionally you should hit your taxable accounts first but there may be exceptions.

also studies show that spending down from seperate cash and bond buckets do

better than just trying to rebalance from a hodge podge of stuff to create your cash flow.

as you can see there is alot to consider. its alot harder taking it out then it was making it.

hopefully now you see how annuities can be a key part to making those valleys less severe... a 6 or 7% dip now in stocks and a 4-5% return on bonds will have you rebalanacing in a valley.. an income from an annuity of 6 or 7 % beefing up that income can have you even and not rebalancing at a loss. thats the idea of the strategy.