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How decumulation in retirement differs from accumulation

When it comes to retirement, people often experience a range of emotional and psychological fears. On top of this, once they have entered retirement, it becomes apparent that their financial and investment needs have changed.

Retirees view the world differently from when they were in the workforce and one of the single largest changes is how they observe and respond to risk. This is a key consideration when investors are shift from the accumulation to decumulation phase of their investment strategies.

Accumulation versus decumulation

Accumulation refers to strategies used by investors to accumulate, or build up, assets to save and invest efficiently over the long term. On the other hand, decumulation refers to retirees drawing down their assets and investments to generate an income and, ultimately, maintain their quality of life in retirement. Decumulation can also be described as the process of investors converting their retirement savings to retirement income.

Accumulation is an almost universal objective for all savers where they are looking to maximise the return on their savings over the period until their retirement. In our recent survey 'Building better retirement futures', the majority of pre-retirees worry about funding their retirement, and the risk/return decision is an important trade off. 

But objectives in decumulation can be much less uniform with individuals having a wide variety of objectives depending on their circumstances and aspirations. It requires a strategic view on factors such as income sources, health care costs, tax, whether to dip into home equity and the like.

In accumulation mode, investors are better able to cope with risk because when markets fall, subsequent contributions are invested at cheaper valuations and become more valuable as markets recover over time. This saving pattern is known as dollar-cost averaging and works in favour of investors saving for retirement.

In contrast, dollar-cost averaging in decumulation - drawing an income in retirement when markets are depressed - works against retirees as drawing an income when markets are down leads to a permanent loss of capital. So, it is critical for retirees to find the right balance between taking investment risk with their retirement savings and protecting the capital from market volatility.

Retirees’ risk requirement, tolerance and capacity

In the current economic environment, it is necessary for retirees to take some form of measured investment risk when it comes to their superannuation balances. If insufficient investment risk is taken, then it is much less likely that retirees will achieve their lifestyle goals. Sound risk management can therefore be an even more critical element for retirees to consider than for people who are still saving for their retirement.

However, people view risk in a unique way and more so in retirement. Even if retirees are emotionally and psychologically willing to take the risk, they may need guidance on just how much risk is appropriate for their goals.

Essentially, during the decumulation phase, retirees not only respond to risk differently, but they also face a host of other associated investment risks, with three main risks being:

1. Market risk and sequence of return risk

Market risk is inevitably linked to any type of investment strategy and is the risk of losing money when a market falls. But as retirees have a reduced risk appetite, they are more sensitive to falling markets. The GFC is an extreme example and resulted in a disruption of many Australians’ retirement plans. Those in the early stages of, or approaching, retirement saw their capital depleted and some never recovered their losses.

Sequence of return, or sequencing, risk is where market risk affects retirees’ portfolios by the order, or sequence, in which the market volatility is felt in a portfolio. For example, if a significant negative market event occurs just after someone retires when they have the largest balance and when they are having to take significant income from the portfolio, then this will have more negative impact overall than if the market event happened at another time when much less income was being drawn.

These risks can be mitigated and managed by the use of fit-for-purpose investments which provide exposure to the appropriate range of risk premia that are needed to provide the required returns over time whilst moderating the extent of market risk.

2. Longevity risk

We all aspire to live a good and long life. However, a common concern for retirees is the risk of living too long and not having enough money to support themselves later in life. Simply put, longevity risk is the risk that they will last longer than their savings.

With life expectancy increasing in Australia, longevity risk is becoming a growing issue for many. Investors, and especially women who have a longer life expectancy, are facing the task of generating income and accumulating enough savings in proportion to lifespan expectancy.

3. Inflation risk

Inflation is the increase in the costs of goods and services over time. Ultimately people’s income also needs to increase in order to afford these goods and services. If retirement savings do not keep pace with inflation, spending power will reduce over time and the standard of living will potentially fall.

A key issue is that, while the Reserve Bank of Australia targets a headline inflation rate of 2% to 3% a year, the specific inflation experienced by retirees can vary significantly from the headline rate. For example, retirees may initially spend more on luxury items than those still in accumulation phase and, when older, on healthcare. In contrast, employee households tend to spend more on housing, children’s education and transport. This difference in household spending needs means that retiree households typically experience different price inflation than employee households, as indicated in the chart.

As one of the main aims of retirement planning is to maintain a certain lifestyle once retired, it is essential that the investment portfolio takes appropriate risk to help maintain the retirees’ spending power.

Fit for individual purpose

The retirement life event is one of the most significant events in Australians’ lives. As savers move from accumulation to decumulation, their feelings and views on risk will change, and the investment risks that are relevant to them will change. It is a certainty that retirees will need to take an appropriate amount of risk with their investment portfolios, or otherwise face the likelihood of not meeting their financial goals. With the help of an adviser, portfolios should include fit-for-purpose investments that increase the likelihood of meeting the financial objectives of each individual.


Richard Dinham is Head of Client Solutions and Retirement at Fidelity International, a sponsor of Firstlinks. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity International. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on our website

For more articles and papers from Fidelity, please click here.

© 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. FD18634.


Paul B
February 21, 2021

Good article - I love the clarity in differentiating between a "Savings" and "Spendings" strategy and I feel more work along this line will go a long way to help retirees plan ahead and also boost their confidence in decision making. The author has also outlined the main risks that retirees need to consider and I believe that “Health Risk” also needs to be a specific category given the prohibitive healthcare and aged-care costs we have in this country.

I believe that in many cases, retirees’ appetite for risk is highly influenced by their past experiences. During my accumulation phase I encountered many events that impacted (reduced) my savings along the way - the GFC being only one. If these events had not occurred, I believe that I could have accumulated 2-3 times the amount that I have now and I still need to keep growing my savings in retirement to meet my standard of living objectives and mitigate these risks. I don’t know what future events will occur that will impact my nest-egg and ultimately my living standard and I am sure many of us are now in the same predicament.

I am quite concerned about statements made in the Retirement Income Review related to where it is considered that retirees over save and underspend and also when the ASFA standards are quoted for proposed annual spending in retirement which, in my view are quite unrealistic. I regularly conduct a breakdown of the specific budget categories and compare them to my annual expenditure and then pull my hair out as to where some of these figures come from.

February 21, 2021

There is a mega, gigantic, huge opportunity for non-profits like industry funds to come up with a "fair and equitable" form of annuity. The only commercial offering around is ludicrously low in its nominal return, so low most won't touch it with a barge pole. But if a half decent annuity could offer say 5-6% of invested capital as a guaranteed return, I suspect many would jump at it. Perhaps the need to hold so much of the assets in fixed interest is the problem but there has to be a better way than the current system; pooling of funds should always be able to lead to better overall outcomes.

February 17, 2021

A key difference between accumulation and decumulation phases often missed in the past has been the tax-exempt status of fund earnings in the latter relative to the former. Funds prudently accrue a deferred tax liability (DTL) for the tax payable on unrealised capital gains included in the earnings cascaded to members (either as a crediting rate or through unit pricing, doesn't matter). But when a member moves from the former to latter, this accrual is no longer needed and can - should - be written back. What happens next? Analogous to the DTL debited to an accumulation member, symmetry and equity demand that a commensurate credit applies during the intra-fund move to decumulation.
Funds have been slow to recognise and remedy this. Some call it a 'bonus' (though the earlier debit was never called a penalty!) The black box of allocating fund-wide earnings spliced into the member's investment / insurance choices has been made more murky by retaining the savings across accumulation and decumulation in hybrid funds (which most will be, with ageing demography).
Savvy members and their planners must check how this write-back is applied in the best interest of members.

Jeff Oughton
February 17, 2021

Governments/financial advisers/asset managers and especially elderly Australians in asset deccumulation mode would do well to deeply consider their financial goals and take into account their residential tenure - ownership v renting a home - as well as their smaller private investments and government welfare support, that is, total private savings and sources of retirement income.

As the Retirement Income Review (RIR) points out "A major misunderstanding is the view that ‘retirement income’ involves the return from investing superannuation balances rather than drawing down those balances to fund living standards in retirement." ... " the home is the most important component of voluntary (private) savings" - and "the more efficient use of (total) savings in retirement" has the potential to improve retirement income.

Put another way, a key issue is that the vast majority of elderly Australians continue to accumulate savings during retirement - oversaving/remaining in accumulation mode during retirement and leaving excess savings as bequests with a cold hand, rather than during life with a warm hand or enjoying a higher standard of living during retirement! That said, there are also exceptions including elderly renters and involuntary early retirees solely dependent on government welfare - the public safety net in line with community standards

February 17, 2021

I don't think I changed my views on investing one iota the day I retired, or in the decade since. At age 60, I was investing for 30 years and probably for my children, so it's a long-term horizon, just like when I was 30. The only difference is I pay a lot less tax on my income in the friendly super system.

February 20, 2021

I agree George.40 years ago I thought the dividends would be a bit of icing on the cake of super( which I dislike intensely). Lots of changes over those 40 years,nothing I did changed. Reinvest dividends for when I retire. The dividends are far more than I need to live on.Then the super is the icing on the investment cake. Now I pay far more tax than I did when I was working,but the good side is I earn far far more than I did when I was working.

February 23, 2021

Most people don't realise that an account based pension can generate more earnings in retirement than was generated in the accumulation phase. If the individual becomes risk averse and chooses a very conservative setting, the fund balance is very likely to shrink quickly over a couple of decades. You only need to look at the 10 and 15 year published average return figures from funds to see the differences between their balanced and conservative option returns.


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