Sign up to receive exclusive monthly wealthtech insights and interviews from our Chief Growth Officer, Jack Sharry. SIGN UP NOW



You’ve helped your clients invest and save for retirement. What can your firm do now to guide clients on how to draw down on their assets and create a longer runway in retirement?

What is Accumulation? What is Decumulation?

One of the main reasons clients engage financial advisors is to help them invest in ways that will let them achieve their desired lifestyles in retirement. This is the “accumulation” phase of an investor’s life. Channeling income into taxable and tax-advantaged accounts and investments is critical to accumulation, but it’s only half the solution.

Once clients stop working, they enter a phase called “decumulation.” And many retirees will fail to harvest the full benefit of their accumulated wealth.

What is Accumulation? What is Decumulation?

Accumulation Phase

Accumulation refers to the phase in financial planning when individuals actively save and invest their money with the goal of building wealth over time, typically for retirement. During this phase, clients hire financial advisors to provide investment guidance and help them achieve their desired retirement lifestyles.

During the accumulation phase, individuals focus on building and managing three types of wealth to maximize their retirement benefits:

Decumulation Phase

The decumulation phase begins when an individual starts withdrawing or taking income from accumulated assets, usually when they decide to retire fully or partially from work. Unfortunately, retirees often struggle to fully leverage and harvest the full benefit of their accumulated wealth during this phase.

In the decumulation phase, retirees transition from saving and investing to generating income from their retirement assets to support their living expenses. They may rely on various sources of retirement income, such as Social Security benefits, pensions, annuities, and distributions from retirement accounts.

Old and outdated strategies for guiding clients in the decumulation phase involve withdrawing a percentage from all available invested assets annually (often 4%) or liquidating assets in a prescribed order of taxable assets followed by tax-deferred assets and then tax-free assets.

Both of these accumulation and decumulation approaches have a significant flaw – they overlook the impact of investment taxes on net returns in the accumulation and decumulation phases. LifeYield provides financial firms with an API (advanced programming interface) library of solutions to minimize taxes on a household portfolio over time and optimize the timing of filing for Social Security benefits.

What Is Decumulation in Retirement?

Retirement decumulation involves turning accumulated assets into retirement income. Typically, the retirement decumulation phase begins with an event – retiring from work, transitioning to part-time employment, the death of a wage-earning spouse, or a divorce. These events require clients or households to liquidate assets for income and financial security.

During the retirement decumulation phase, retirees face several challenges that require careful planning and strategizing. One of the primary challenges is identifying the most tax-efficient ways to sell assets and make withdrawals. This involves considering the tax implications of different investment accounts and determining the optimal order in which to liquidate assets to minimize tax liabilities. Only an integrated set of strategies at the household level can meet these challenges and form a comprehensive and sustainable decumulation plan.

Coordinating asset sales with government benefits, such as Social Security, is another crucial aspect of decumulation. Retirees need to understand how their income from asset sales may affect their eligibility for and taxation of government benefits. Coordinating these sources of income ensures that retirees can maximize their overall retirement income while maintaining eligibility for important benefits.

Protecting wealth and retirement income from inflation is also a significant concern during decumulation. Retirees need strategies in place to ensure that their income keeps pace with the rising cost of living. This may involve investing in inflation-protected assets or utilizing strategies that adjust the withdrawal rate based on inflationary factors.

To address the challenges of decumulation, a comprehensive and sustainable plan is required at the household level. It involves integrating various strategies that consider tax efficiency, coordination with government benefits, and protection against inflation. Financial advisors play a vital role in helping retirees develop and implement such plans to ensure a financially secure retirement.

LifeYield provides integrated retirement decumulation solutions that maximize post-tax retirement income without requiring technology replacement or new database development. LifeYield’s tax-efficiency APIs can also be applied to assets that may not be under the direct management of an advisor but need to be factored into the overall decumulation and retirement security plan. By incorporating these solutions, advisors can offer comprehensive decumulation and retirement security planning to their clients.

What Is a Retirement Decumulation Strategy?

A retirement decumulation strategy is a personalized blueprint for systematically drawing down on a client’s assets over time. It must be tailored to clients’ (and their spouses’) individual circumstances and aim to achieve what retirees say they want most: confidence that they will not outlive their assets.

When developing a decumulation strategy, financial advisors engage in discussions with their clients to gather important information and make informed decisions. Some of the key topics that advisors will need to address during these conversations include:

Decumulation Planning Considerations

By understanding clients’ income expectations, evaluating their assets, and discussing potential lifestyle adjustments, advisors can create a decumulation strategy that aligns with clients’ goals and maximizes their financial outcomes. These conversations provide crucial information for effective decumulation planning, including:

A decumulation strategy emphasizes examining expectations, evaluating assets, and counseling clients when they may need to adapt their plans to produce the best results. While these conversations may be unfamiliar territory for some advisors, they play a vital role in creating a decumulation plan that aligns with clients’ goals and maximizes their financial security in retirement.

income sourcing - household income

What Is Decumulation Planning?

A decumulation plan is a tangible application of the decumulation strategy that is tailored to each client’s unique circumstances. It is concrete and actionable, helping to keep clients well-informed and providing them with a road map to help clients stay on track throughout their retirement journey. A good plan is coherent, transparent, and realistic, based upon a solid strategy and bullet-proof tools. It is responsive to changes in markets or clients’ circumstances, such as health issues or death, that require revisiting and revising the decumulation plan.

A comprehensive decumulation plan for clients typically includes the following components:

It is important to reiterate that clients want to know the clear steps to convert assets into income and expect to understand how their investments will support their income expectations on an annual basis. They expect to have a transparent view of how their investments will support their income expectations on an annual basis. Regular check-ins with their advisor are anticipated and expected to evaluate the feasibility of their decumulation plan throughout retirement. This ongoing assessment addresses questions such as:

By addressing these questions and ensuring regular communication and monitoring, advisors can help clients maintain confidence in their decumulation plan and make necessary adjustments as circumstances evolve.

How Do Taxes Affect Decumulation?

How Do Taxes Affect Decumulation?

Advisors can improve client outcomes by focusing on three key variables: cost, risk, and taxes. Among these, taxes have the most substantial impact on investor returns, which can be surprising but shouldn’t be overlooked. Taxes have a significant impact on decumulation and can influence the overall success of a retirement strategy. By understanding and effectively managing the tax implications, advisors can help improve client outcomes and enhance their portfolios.

One key aspect of tax management in decumulation is maximizing tax alpha. Tax alpha refers to the surplus of a portfolio’s after-tax return over its pre-tax return. It measures the additional returns that can be achieved by implementing tax-efficient investment strategies. A high tax alpha indicates the skill and proficiency of the account manager in minimizing the impact of taxes on the portfolio’s performance.

Essentially, tax alpha refers to the additional returns investors can achieve by implementing tax-efficient investment strategies. Maximizing tax alpha offers several advantages for clients and advisors:

It is crucial for advisors to proactively address tax considerations during the decumulation phase. This includes analyzing the tax implications of various investment decisions, understanding the tax-efficient ordering of asset sales or withdrawals, and exploring tax optimization opportunities such as utilizing tax-advantaged accounts. By incorporating tax management strategies into the decumulation plan, advisors can help clients maximize their after-tax income and improve their overall financial outcomes during retirement.
Tax Alpha Success Strategies

Paul R. Samuelson is LifeYield’s chief investment officer and co-founder. His work is the basis for the algorithms that are the engines that power the LifeYield tax-smart APIs for financial firms. Samuelson has written about and identified the five drivers of success in achieving tax alpha – tax-smart asset location, multi-account tax harvesting, tax-aware transitions, multi-account rebalancing, and optimal retirement income sourcing.

How Does LifeYield Help You Develop and Communicate a Decumulation Plan?

LifeYield, through its Retirement Income Sourcing API, offers valuable support in developing and communicating a tax-efficient decumulation plan to clients. Here’s how it helps:

Quantifying Tax Efficiency

LifeYield’s APIs utilize planning inputs to generate decumulation plans that prioritize tax efficiency. It quantifies the monetary value of tax efficiency by incorporating strategies such as asset location, withdrawals, required minimum distributions (RMDs), Roth conversions, product choices, and Social Security optimization. By demonstrating the potential tax savings associated with these strategies, LifeYield helps advisors build a solid foundation for a secure and prosperous retirement for their clients.

“What-If” Scenarios and Multiple Options

LifeYield’s Retirement Income Sourcing enables advisors to address “what-if” scenarios with clients. It provides multiple options for determining the sequence of tax-smart withdrawals over time, allowing advisors to explore different strategies and their impact on taxes. This helps clients gain a better understanding of the implications of various choices and make informed decisions about their retirement income.

Tax Breakdown and Configuration

Retirement Income Sourcing produces detailed federal and state tax breakdowns, taking into account all relevant factors. This helps clients visualize the tax implications of different strategies and provides transparency in the planning process. Additionally, Retirement Income Sourcing can be configured to align with the preferences, assumptions, and level of detail required by each firm. This flexibility ensures that the decumulation plan aligns with the specific needs and preferences of the firm and its clients.

Personalized Retirement Strategies at Scale

LifeYield’s Retirement Income Sourcing API allows advisors to personalize client retirement strategies at scale without disrupting their firm’s technology investment. By leveraging the API’s capabilities, advisors can efficiently develop tailored decumulation plans for each client, taking into account their unique circumstances and goals.

LifeYield’s API empowers advisors to develop tax-efficient decumulation plans, explore different scenarios, communicate the benefits of tax strategies to clients, and provide a personalized retirement strategy that aligns with each client’s needs.

What Else Can I Expect from LifeYield?

Firms must weigh the benefits of adopting new technology with its costs. LifeYield addresses the challenge of adopting new technology in a way that provides significant benefits to firms. Here’s how:

LifeYield is ready to demonstrate how its solutions can enhance your firm’s value proposition and deliver tangible benefits to your clients and shareholders. Through its proven technology, flexibility, and track record, LifeYield can help your firm achieve improved client outcomes and strengthen its position in the market.

Let us show you how LifeYield can enhance client outcomes, increase assets under management, and boost your earnings.

Get started with LifeYield Retirement Income Sourcing