Decumulation Investing: How to manage your money after retirement

July 14

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Most of my readers, including myself are at the age where we are very focused on wealth accumulation and equipping ourselves with the various capital-growth and income-generating assets.

Often, we forget to think about how to shift from wealth accumulation to wealth decumulation. This is an important change in our investment strategy when we transition to retirement.

What is wealth decumulation?

Unlike wealth accumulation where the focus is on maximising returns, wealth decumulation focuses on maintaining an income stream that will be used to fund for retirement expenses. Because of the change in investment purpose, the investment choices made will be targeted on assets that can support that income stream.

A decumulating investment strategy requires a clear strategy around which asset to sell in order to fund retirement expenses and which asset to buy to continue to grow the investment portfolio so that the portfolio does not reduce to zero without taking on too much risk and volatility.

Sounds complicated, doesn't it?

In this article, I will share my thoughts on decumulation investing from the point of view of a retiree.

Accumulation investing is easy to implement as you basically need to save and invest efficiently over time. The process has been made even simpler with the help of robo advisors like AutoWealth and Endowus. But these platforms aren't prepared for decumulation investing and you may need to implement your decumulation investment strategy manually.

3 major challenges of decumulation investing

Let's look 3 major challenges you will face when shifting from accumulation investing to decumulation investing.

Switching from dollar-cost averaging to dollar-cost ravaging

Creating an accumulation investing strategy can be made simple by consistently funding your diversified investment on a regular basis - dollar-cost averaging. But a decumulation investing strategy is much more complex. Not only are there no fresh funds being injected into the investment portfolio, you are also drawing down from your portfolio to pay for your monthly retirement expenses.

One of the risk of drawing down from your investment to pay for retirement expenses is that you may need to sell more units when prices are low and sell fewer when prices are high. In a volatile environment such as the pandemic that we are experiencing today, this can prematurely erode the value of the investment portfolio. This is often referred to as sequence of returns risk because a sequence of returns where the market dips before a recovery could be the worst sequence of returns.

Risks and volatility are now your enemies

Unlike the wealth accumulation phase where risks and volatility are your friends, they become your enemies when you transition to wealth decumulation. Risks and volatility are some of the variables contributing to sequence of returns risk. The higher the volatility, the higher the probability your investment portfolio makes gains or losses. In the situation where your investment portfolio makes a loss, you may experience a bad sequence of returns that could deplete your investment portfolio earlier than expected.

You should change the asset allocation of your investment portfolio to downshift the volatility of your portfolio. While it may result in a lower annual return, your portfolio becomes much more predictable with less likelihood of experiencing a bad sequence of returns.

But at the same time, your investment portfolio still needs to embrace some volatility in order for it to continue to grow, abeit slower than accumulation investing. This is important as it extends the lifespan of your investment drawdown period and the value of your investment portfolio does not deplete too quickly.

Stock liquidity becomes a key factor

Due to the need to sell off part of your investment portfolio regularly to fund your retirement expenses, liquidty of the stocks in your portfolio becomes an important factor when choosing between two stocks or ETFs.

When a stock is has low liquidity, it means that there is little or no market demand for it. A large buy order could drive up the stock price and a large sell order could depress it. When the market declines as a whole, you may not be able to sell your stock quickly unless you are willing accept a much lower price, suffering an unexpected and unnecessary loss.

Building a flexible retirement portfolio

The challenges that I have highlighted above can do devastating and even irreversible damages to your investment portfolio if they were to happen when you least expected them to. But isn't that what the market is all about?

The biggest problem I see in the FIRE community is that their investment portfolio is the core of their FIRE strategy. But in reality, while your investment portfolio will form part of your retirement portfolio, you should avoid making it the center of your retirement portfolio.

When building your retirement portfolio, you just need to remember the rules of retirement portfolio planning.

Rules of retirement portfolio planning

Rule number 1: Never run out of money.
Rule number 2: Never forget the first rule.

I can't give you a crystal ball to avoid the unexpected. They don't sell them on Taobao yet.

But what you can do, is to build flexible retirement portfolio that can provide you some buffer when your decumulation investing strategy takes a hit from the economy.

Maintain a cash buffer of 1-2 years' worth of retirement expenses

The starting point of a bad sequence of returns begins with having to continue decumulating your investment portfolio in a bear market to fund your retirement expenses. The way to prevent this from happening, is to have the flexibility to pause decumulation of your investment portfolio and use a different asset to fund your retirement cash flow.

The simplest way to achieve this is to maintain a cash buffer of 1-2 years' worth of retirement expenses. It could be as little as $100,000 if you spend $50,000 each year in retirement. This cash buffer will create the flexibility of choosing not to touch your investment portfolio in a bear market year, giving it the time it needs to recover.

Defer your CPF Life payout by another year if you can afford it

If you are 64 and have no issue funding your retirement expenses in the next year, defer your CPF Life monthly payout by another year. Your monthly payout will increase by up to 7% for every year of deferment (source). An increase in your CPF Life monthly payout reduces your reliance on your investment portfolio for retirement expenses and that allows you to stretch the number of years you can draw down from your investment portfolio.

Don't worry, this is reversible if something goes wrong. You just need to give CPF one month notice.

You can refer to this online demo video to learn how you can defer your CPF Life payout online.

Adopt an Asset-Liability Matching asset allocation for your decumulation investment portfolio

There is an approach you can consider to address the uncertainties associated with managing a decumulation investment portfolio. That is to apply an Asset-Liability Matching asset allocation process.

Asset-Liability Matching (ALM) is an investment strategy where you match future assets sales (decumulation) and asset/income streams against expected future expense obligations like your child's university education. It is a form of risk management in which you mitigate or hedge the risk of failing to meet your liability obligations.

A simple way to do this is to map out how much you you need to spend each year, and identify how you are going to fund it with your retirement portfolio, i.e. your decumulation investment portfolio and other asset/income streams.

Sophisticated financial advisers often use ALM to advise their wealthy individual clients, using multiple growth and withdrawal scenarios to ensure that their clients will have adequate cash when needed. Even in the FIRE community, this approach is very common as members use FIRECalc to perform a Monte Carlo simulation to average the results of thousands of possible scenarios and determines the success rate of your retirement plan.

Build a multi-asset retirement portfolio that is not overdependent on a single asset class

A multi-asset portfolio strategy combines different types of assets, such as stocks, bonds, real estate or cash to create a more flexible and broadly diversified portfolio, tailored to suit your needs. While having a mult-asset portfolio reduces risks and volatility compared to holding a single asset class, it may not necessarily deliver the maximum potential return.

For example, a single-asset portfolio of stocks may deliver more returns than an multi-asset portfolio of stocks, bonds and real estate during a bull market in exchange for greater risks and volatility. But historically, there hasn't been a single asset class that continues to outperform during every period.

Putting it all together

Building a multi-asset portfolio that is tailored to your retirement goals can be quite difficult even if you decide to choose the easy way out by investing all your money in a multi-asset fund. ‘Multi-asset’ by its own definition, is a very broad definition and funds that are labelled as such can often be remarkably different from one another with regards to their investment objectives. The fund managers could also choose to build the portfolio with individual shares, bonds, commodities, property or opt for a selection of collective funds.

But if you were to go with the route of investing in a multi-asset fund, here are a few considerations that you should bear in mind:

  • The objectives and risk profile of the multi-asset fund must match your investment goals and risk appetite. If you have a low risk appetite, do not invest in a multi-asset fund where the fund manager invests 80% of the portfolio in equities.
  • Compare and scrutinise the fund charges of the multi-asset funds that you have shortlisted as some funds have an extra layer of charges because they pay not only for their own manager, but also for the managers of the underlying funds in the portfolio.
  • Long term fund performance and history of manager’s skill and tenure in managing a multi-asset fund matters. Examine only 5-10 year periods of the multi-asset fund where there is at least one year where the economy was weak or in recession and there is likely at least 4 or 5 years where the economy and markets are positive.
  • Avoid funds with unrealistic targets, especially those promising an absolute return above inflation because many have not been able to hit those targets in the long run.

Creating a multi-asset investment portfolio on your own can be very challenging because it would require you to have investing expertise in multiple asset classes. If fund houses require a team of experts to manage the massively diversified portfolios in multi-asset funds, what are the chances of you doing a great job on your own?

I'm not going to pretend that I know enough to teach you how to create a multi-asset investment portfolio that's tailored to your needs. I believe we should make our investment decisions on asset classes that we know enough of to make investment decisions while outsourcing the investment of asset classes that we aren't knowlegeable enough to make investment decisions.

Here's what you can consider when creating your multi-asset portfolio. Remember, our objective is to ensure we have sufficient asset sources to sell off or generate income to pay for our retirement expenses without depleting before our death.

Emergency cash fund

The more you have in your emergency cash fund, the more flexibility you can be when hit with unforeseen circumstances, like the pandemic that we're experiencing right now.

Let's look at the history of the S&P 500 since its inception all the instances when the market fell more than 20% below a prior all-time high, which is the what is commonly defined as a bear market.

The table above shows that the median time that past bear markets took to recover was 645 days. The shortest time was 212 days, and the longest 2423 days. 5 out of the 9 bear market instances recovered in less than 2 years.

Personally, I'd advocate having 2 years' worth of retirement expenses as it can be an alternate source of income to tap on during a bear market instead of decumulating from equities for retirement expenses. A strong emergency cash fund will help you mitigate the sequence of returns risk during your retirement.

2 years is also more than enough time for you to assess the economic situation and decide your next course of action. There's no shame in coming out of retirement and working for a few years to pay for your expenses if it helps you prevent your retirement portfolio from depleting too quickly.


The equities portion of your retirement portfolio is tasked with the objective of ensuring there's sufficient investment growth to prevent your retirement portfolio from depleting and running out of money when you're old. This investment growth is also what prevents the value of your portfolio from eroding due to inflation.

Because you are already at a retiree stage, time is not on your side.

You can split your equities investment into two portions.

The first portion can go into a diversified equities portfolio for reduced volatility. To keep things simple, you can consider looking for exchange-traded funds (ETFs) that will invest your money in a broad diversified portfolio of stocks in your preferred sector or market. This portfolio will focus on growth and accumulation.

The second portion can be channeled into a portfolio of dividend-paying stocks that have decent dividend yield and low volatility. This portfolio will focus on generating income that you can reinvest or use for retirement expenses.

Fixed income

Fixed income investments are municipal bonds, corporate bonds, government bonds, and Treasury bonds that pay returns on a fixed schedule. In exchange for holding the bond, the borrower agrees to pay you interest for a set amount of time and when the bond matures the principal is returned to you. The interest income or yield you receive from a bond can be a steady source of retirement income.

Diversification is important when building a portfolio of bonds. You should hold a mixture of government and corporate bonds that are rated as investment grade. While government bonds are generally much safer, they offer lower yields. Corporate bonds on the other hand offer a much higher yield in exchange for higher risks.

If you don't want to research and select bonds on your own, you can opt for bond funds that consists of a professionally-managed portfolio of bonds.

For readers who are planning your retirement early, your CPF Ordinary Account and Special Account could also act as a fixed income component of your portfolio, yielding 2.5% and 4% interest respectively. It would only work well if you have spent years planning and growing your CPF accounts early and applying a 'CPF Shield' to minimise the amount of money channeled from your Special Account to your Retirement Account.

Real estate

If you haven't already invested in real estate during the accumulation investing stage, it's hard to encourage anyone go invest in real estate at the decumulation investing stage because it's too capital-intensive to invest with cash alone, and unwise to take unnecessary leverage and risks to finance the purchase with debt.

On top of that, the illiquid nature of real estate poses as a matter of concern as well.

But if you already own real estate that's providing a decent rental income, you can consider it as part of your multi-asset investment portfolio.

Alternative investments

Some of us may have in-depth knowledge in some alternative investments that many may not be well-versed in. It could be modern alternative investments such as cryptocurrencies or old-school favourites like commodities such as gold, silver or other precious metals. Some may argue that collector's items like Magic The Gathering cards, antiques and art pieces are worth investing and holding for their value as well.

However, I feel that it's questionable why one would want to continue holding these alternative investments in the decumulation phase because alternative investments like cryptocurrencies are too volatile while commodities like gold is mostly used as a hedging tool instead. Collector's items may yield surprisingly high returns if the right buyer is secured but these items are too illiquid to be considered as part of a retirement portfolio.

Reduce your dependency on your multi-asset portfolio with other income streams

Apart from having a strong emergency cash fund of 1-2 years' worth of retirement expenses, you can also create additional income streams that can pay for part of your annual retirement expenses. That reduces the amount of money you need to draw down from your multi-asset investment portfolio each year.

I don't consider these income streams as part of my asset allocation as they are designed solely for cash flow.

CPF Life

CPF Life plays an important cornerstone of your retirement plan as it can pay for part of your retirement expenses. Because the payout is guaranteed without any risk, you can be confident that the money will reach your bank account without fail.

Private annuities

On top of CPF Life, you could consider purchasing private annuities to create additional income streams for your retirement expenses. I'd strongly encourage looking at only the guaranteed portion of the quotation of the annuity insurance product because I deem anything that's non-guaranteed as a bonus. That's a conservative view, but I believe we can all benefit from being more conservative in our retirement planning.

How would my retirement portfolio look like at 55?

If I continue to work till 50 with a salary above $6000 and continue to accumulate my investment portfolio every month, what would my retirement portfolio look like?

I made a projection based on the above and ended up with a retirement portfolio below with my CPF monies in my Ordinary Account and Special Account as the fixed income component. I imagine I'd modify my equities portfolio for a less volatile growth strategy with a portion focusing on dividend yields.

What you don't see in this portfolio is the income stream from CPF Life that starts at 65 and the money in my SRS account which I have not decided what to do with at 62. I could choose to draw down the money for the next 10 years, purchase an annuity to create an additional income stream, or funnel it back into my CPF account to build up my fixed income component of my portfolio.

Ultimately, everything is still a work-in-progress and I expect my retirement portfolio to continue to evolve as I learn more about managing money and retirement planning.

How are you planning your decumulation investing strategy? I know that most of my readers are still very much focused on their accumulation investing strategy, but it doesn't hurt to have a draft plan of your decumulation investing strategy that you can subsequently develop further as you get closer to retirement.



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About the author 

Mickey J


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