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“Decumulation”, in definitional terms, means the conversion of pension assets accumulated during an employee’s working life into pension income to be spent during retired life. But in practical terms, decumulation embodies a significant new risk for the record number of future retirees moving from the accumulation phase of their lives to the distribution phase. The actuaries call it “longevity risk”. But those of us in the financial service industry simply call it “running out of money”.

It will require a major change in thinking for them. Away from concepts which have been discussed as part of most 401(k) providers investment education programs: asset allocation, dollar cost averaging, and the cost of waiting. But rather requiring them to think about having to make a whole new set of decisions such as:

  • Whether to continue to work
  • When to apply for Social Security benefits
  • What to do, if anything, about housing
  • What choices to make about insurance and health care
  • How financial assets should be invested
  • What distribution options to take from employer retirement plans and IRAs

So you’ll be hearing more about "decumulation" as it becomes a major focus of future research, public policy, and financial services.

Picture credit: Water Secrets Blog.