Why accumulation still matters in retirement
In an environment where retirees face longer life expectancies, inflationary pressures and ongoing market uncertainty, constructing a robust decumulation framework is crucial. How can advisers help clients ensure they balance short- and longer-term needs for a retirement journey that could last for multiple decades?
Traditionally a shift from accumulating wealth to drawing an income from it, retirement is now increasingly a journey that can last for several decades. When this is coupled with other pressures that can also erode purchasing power and exhaust savings over time, helping clients remain financially secure throughout has become more challenging for advisors.
Retirement introduces a new set of risks that differ from those experienced during accumulation. One of these is longevity risk. People are living longer than ever, meaning retirement can now last 30 years or more. For example, a 67-year-old man today has an average life expectancy of 85 yet has a one-in-four chance of reaching 92 and a one-in-ten chance of reaching 96.
Another challenge is inflation. Even modest inflation can significantly reduce purchasing power over time. Retirees risk seeing their purchasing power gradually eroded, potentially forcing them to reduce their standard of living later in retirement.
A third issue is pound cost ravaging. This occurs when clients are forced to withdraw income from their portfolio during a market downturn. As asset values fall, a greater number of units must be sold to generate the same level of income, resulting in a permanent reduction in capital.
Blending approaches
A single decumulation strategy is unlikely to address all of these challenges effectively, which is why a diversified, multi-strategy framework is often required. This combines different approaches according to clients’ individual circumstances and stages of retirement.
Many diversified decumulation strategies approach this by combining income-producing assets with growth-focused investments. The purpose of the growth allocation is not necessarily to generate immediate income, but to replenish capital and create flexibility for future withdrawals. This can be particularly valuable when unexpected expenses arise or when inflation increases income requirements over time. In building a framework, advisers often break down retirement into the distinct phases to account for the different needs and balance between spending and saving.
Adapting to different retirement phases
In early or active retirement, clients often have higher spending needs and want to maintain an active lifestyle. During this phase, a combination of income-generating investments and growth-oriented assets can be particularly effective. The income component helps fund current spending, while the growth component can help manage longevity risk by replenishing the portfolio over time.
For example, some advisers may use a multi‐fund ‘bucket’ strategy, where assets are allocated across funds with different risk profiles. Drawing income from a lower-risk allocation during periods of market volatility can help reduce the need to sell growth assets at depressed valuations, while periodic rebalancing can support the portfolio's long-term sustainability.
As clients move into mid-retirement, capital preservation naturally becomes a greater priority. Ideally, this phase would include an element that gives a stable minimum income while still allowing growth funds to build up capital reserves that may later be needed for healthcare costs, long-term care or other unexpected expenditures. For example, one possible approach is to blend sources of guaranteed income, such as an annuity, with investments that can provide both income and growth. In this scenario, guaranteed income is intended to cover essential expenses, while other investments can support discretionary spending and provide potential capital growth.
Even in later life, when income certainty becomes increasingly important to help fund potential care needs, growth investments may continue to provide valuable support by helping offset inflation and preserve the value of remaining assets. For this phase, one approach is bucket-style multi-asset funds, with allocation adjusted to be more conservative than an even split between low-, medium- and high-risk funds. Here, the low-risk bucket for income is expanded, ensuring more stable cash flow in later years while preserving remaining assets.
An alternative is again the hybrid strategy, but with an emphasis on the annuity element. Increasing the annuity portion or emphasising the guaranteed income part is especially beneficial for covering rising essential costs like long-term care.
Conclusion
Navigating retirement as lifespans increase can be complex. But by combining income generation, capital preservation and capital growth as part of a tailored decumulation framework, advisors can play a crucial role in helping portfolios withstand challenges over time.
The value of investments may fall as well as rise and investors may not get back the amount invested.
The information contained in this document is provided for use by professional advisers and is not for onward distribution to, or to be relied upon by, retail investors.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
No guarantee, warranty or representation (express or implied) is given as to the document's accuracy or completeness. This document is issued for information only by Keyridge Asset Management.