31 May 2022
Cracking Open the Nest Egg: common questions from Martin Hawe’s latest book
1. What does “decumulation” mean?
That’s a good question, given the topic that the book addresses. Decumulation is the opposite of accumulation; we spend most of our lives accumulating wealth, but there comes a time (retirement) when we need to use that wealth to give us an income when we no longer have one from work.
My parents’ generation would not have recognised the word (or the idea) of decumulation. They invested their savings (usually in bank deposits) and lived off the interest (or dividends if they owned any shares). Essentially, the capital remained intact – they only spent the cash returns.
Today, retirees genuinely decumulate – they run the capital down (perhaps aiming to die with nothing) as they spend not just their investment returns but also their capital as well. The current generation of retirees has to use capital as well as investment returns because life expectancy is much greater (your money may now need to last 25 years or longer) and because interest rates are lower.
Decumulation is difficult because we want to spend at a level that gives us the best life, but we do not want the money to run out before we do. That balance, and drawing the right amount from your portfolio, can create a tension running right through retirement.
We do not really know what will happen in the next 25 years, and so we need some of everything – a mix of diverse investments.
Times are unusual at the moment, with no particular asset class performing. That has people looking around for the investment silver bullet. Such a weapon does not exist, and my big message in these times is to stay diversified and be patient.
So, these are the main themes on the topic of decumulation as judged by the media and readers. You learn a lot when you write a book (a lot of research), but you learn a lot again when it is published, and people start asking questions.
A financially resilient investment portfolio is one that is fully diversified, and which includes growth assets to protect against the effects of inflation over the long term.
The loss of a partner through relationship breakdown or death can have a significant impact in retirement, which is difficult to recover from. The costs of living alone are far greater than half the costs of a couple. Many living costs, such as rates, insurance and internet, are fixed costs that don’t change when the household goes from two people to one. If a relationship breaks down, and this is increasingly common later in life, assets can be halved, leaving both parties in a poor financial situation. Taking care of your health and your relationship is therefore vital for the protection of your financial resources.