Nearly Half of Retirees Have No Formal Decumulation Strategy

While “decumulation” may be trending among retirement plan professionals heading into 2025, it may not be on the radar of many retirees.

According to a survey of 264 retirees conducted in October by IRALOGIX, about half (49%) said they forgo a formal retirement savings withdrawal strategy, instead opting to take what they need as they go. Meanwhile, 53% reported that they adjust their withdrawals based on a change in their personal lives (not market changes or more holistic financial planning) or, otherwise, do not make any adjustments at all.

IRALogix, founded in 2015, offers wealth managers a white label individual retirement account service with no minimums to create relationships with “tomorrow’s clients.” When it comes to those who have gone through their working years and are in retirement, however, the firm found that 46% receive minimal or no decumulation guidance from their employer or 401(k) provider.

For people to manage through retirement, that needs to change, says Peter de Silva, IRALOGIX’s CEO.

“It is important for a retiree to have a thoughtful, comprehensive approach to decumulation,” de Silva says. “Unfortunately, most people are left woefully unprepared by their workplaces and providers.”

When it comes to decumulation planning, only 22% of respondents said they draw down their savings as part of a systematic process based on a fixed annual percentage. Another 17% said they only spend dividends and interest.

De Silva, who has experience in both individual wealth management and institutional asset management, is a proponent of retirees creating a plan that leads to withdrawing a percentage of their available assets. That strategy, he says, will allow them to flex their spending up or down, depending on the markets.

A “fixed dollar” approach can also work, though that may create problems either by running out of money if markets drop or by missing out on gains if markets are up, according to de Silva.

Inflation and Health Care

If retirees do mismanage decumulation, more than half may run out of funds within a year, according to the survey. Among the 264 survey respondents, 31% maintain a cash reserve cushion to meet unexpected expenses that lasts from six to 12 months, and 25% do not maintain a cushion at all.

Meanwhile, two areas in which retirees may need guidance are adjusting for inflation and planning for health care costs.

According to IRALOGIX, 44% of respondents said inflation has minimal to no impact on their savings withdrawals, with another 31% noting that they know there is some impact, but they have not made any adjustments to accommodate it.

Those statistics are a problem, in de Silva’s eyes, as inflation can create a real “erosion of savings” that can cause problems for retirees who are not planning on it.

The survey also revealed a lack of understanding of health care costs: 39% of respondents said health care costs do not play a significant role in withdrawal strategies. De Silva says a vast amount of expenses can hit in the last year or two of life, which can significantly alter a person’s plans for what they might leave behind to heirs.

For health care, de Silva recommends creating a financial plan to address or, potentially, mitigate losses through an investment in long-term health insurance.

6 Factors

De Silva boils a strong retirement decumulation plan to six dimensions:

• Setting retirement lifestyle goals;
• Considering what you want to accomplish in retirement;
• Estimating health care needs;
• Estimating tax spending;
• Settling on a risk tolerance level; and
• Having an estate plan for where remaining assets should go when you pass.

Following these steps will create a “much more responsive approach that can help extend the life of the 401(k) balance,” de Silva says.

To create such a plan, however, takes a “triangle of resources,” per de Silva, including an employer, a recordkeeper and an adviser, when possible. But since most people currently do not work with an adviser, de Silva says employers will have to start taking more responsibility for providing guidance or connecting people to resources.

“There is such little decumulation advice out there,” he says. “Since all this comes down to having a decumulation plan that links to your overall financial plan and estate plan tied together in a thoughtful way, plan sponsors and recordkeepers need to do a much better job of providing guidance.”

In coming years, de Silva expects in-plan resources for participants to continue improving and evolving.

“In five years, I think there will be a whole cottage industry just around decumulation,” de Silva says. “We need to solve this problem, and at the moment, nobody is solving it well.”

IRALOGIX’s survey was conducted online in October 2024 with a national sample of 264 retirees.