Decumulation is the process of spending down your net worth so you don’t die with too much money. If you die with lots of money left over, you’ve essentially wasted all the time and energy it took for you to accumulate that money.
At the same time, nobody wants to run out of money before they die. Given our health and energy tend to decline as we age, we may be less capable of earning money in the last quarter of our life. Therefore, it’s best to die with at least enough money to cover all our death-related expenses.
To live our best lives, we should ideally have the smoothest consumption curve possible. However, I have a feeling as personal finance enthusiasts, most of us will end up working for too long and saving too much.
Therefore, let’s discuss the best age for decumulation. This topic is important to me because I’ve decided to enter the decumulation phase this summer starting at age 45.
Why I’m Entering The Decumulation Phase
Ever since I was in middle school I’ve frequently thought about my mortality.
When I was 13, my 15-year-old friend, Mark, died in a car accident. His death sliced open the security I felt as a kid. I was looking forward to skateboarding with him after I returned from summer break. But when I called his house, his mom picked up and solemnly broke the news.
Ever since that day, I’ve felt some level of survivor’s guilt. It became harder to be lazy because that would mean disrespecting Mark, who never even got the chance to try.
Partially out of fear I wouldn’t even make it to age 60, I decided to “retire” at age 34. This way, I could improve my odds of living a better life with fewer regrets. Essentially, early retirement was a hedge against an early death.
With about a $3 million net worth I decided to forsake more money to gain back more freedom. Luckily, due to a bull market since 2012, my net worth has grown with the markets.
Even with a wife and two young children to support, based on our current and projected expenses, we have over-accumulated. Specifically, our net worth equals about 70 times our annual expenses.
If we add 70 to our ages, 45 and 42, we get 115 and 112. Sadly, no matter how healthy we eat or how often we exercise, we will likely not live past 110. Therefore, decumulation is in order.
The Best Decumulation Age To Live Your Best Life
Given the median life expectancy is about age 80, the best decumulation age is somewhere between 40 and 60 years old. The younger you can decumulate, the more enjoyable your life may be because you get to do more fun things with your money when you’re healthier.
However, decumulating at age 40 is riskier as it means you may have to plan for at least 40 years of spending. Whereas decumulation at 60 is less risky because you may only have to plan for at least 20 years of decumulation.
Why Decumulating Between Age 40 and 60 Is Ideal
Between the ages of 40 and 60, your health is usually still quite good. Further, you’re relatively wealthy after 20-40 years of saving and investing. This combination of good health and high net worth is the optimal combination to better enjoy your money.
At this age range, most people can still walk five miles to play the Pebble Beach golf course, walk up the 600 steps in Santorini, or hike the 26-mile Inca Trail over several days. OK, maybe you’d rather take a bus to get to the top of Machu Picchu instead.
Meanwhile, if you die relatively young (<70), then you will have better maximized your wealth and time spent making money. In the old days, people retired around age 65 and then died a few years later. How sad is that? It’s especially terrible if you spent your entire career working at a job you disliked.
Decumulating before age 40 may be a little too risky if you are in good health. It’s better to let as much of your investments stay invested so they can compound. Further, retiring before age 40 is also not the ideal age for retirement. Your earnings power usually goes up in your 30s and 40s.
Waiting until after age 60 to decumulate is what most people do. After age 59.5, Americans can start withdrawing from their tax-advantaged accounts tax-free. Meanwhile, most Americans retire between 61-65, partially because Social Security can start being collected at 62+.
Easiest Way To Calculate The Ideal Decumulation Age
Although I’ve suggested the best age range to decumulate is between 40 and 60, everybody is different. Therefore, here’s an easy way to calculate your decumulation age.
1) Decide which retirement philosophy you follow. There are two general retirement philosophies. The first is dying with as close to nothing as possible, i.e. the YOLO retirement philosophy. The second is dying with money left over to help others and keep your legacy alive. Most people are somewhere in between.
2) Once you’ve decided on your philosophy, take 80 minus your current age to see how many years of expenses you need to cover. If you subscribe to the YOLO retirement philosophy, use a small number, like 70 minus your current age. Your goal is to spend more money while living. If you subscribe more to the Legacy retirement philosophy, use a larger number, like 100 minus your current age. Your goal is to have money left over after you die.
For example, given I’m slightly in favor of the Legacy retirement philosophy, I’ll use the number 90. Subtracting my age, 45, from 90 equals 45.
3) Once you’ve calculated how many years left you have to live, compare that number with the number of years of expenses you have accumulated. If your expense multiple is far greater than the number of years you have left to cover, then decumulation is in order.
Given my family has a net worth equal to about 70 years of expenses, we need to get cracking on decumulation since we’ve only got about 45 years left to live.
Although getting old can be expensive, health insurance, long-term care insurance, and life insurance should cover most health expenses. Therefore, make sure you have these three types of insurance if you’re worried about a disaster. After we both renewed our life insurance policies recently, we felt even more at peace.
Case Study For Decumulation
To figure out how much you want to decumulate, you must first decide how much money you want to die with. I’ll start with myself as a case study for determining when to start decumulating.
My most recent net worth goal was to accumulate the maximum estate tax threshold as a couple to leave to charities, my children, and relatives. We would then spend and give away every dollar over the estate tax threshold instead of paying a ~40% death tax.
However, the estate tax threshold has gone up quickly every year, especially in 2018 when it doubled. The threshold is now at $24.12 million for a couple, which seems incredibly generous.
I feel like dying with that much money is a waste, even though plenty of truly rich people set up trust funds and die with way more. Therefore, I’ve decided to decumulate well before hitting $24.12 million.
I’m assuming the estate tax threshold will eventually go lower. But who knows given how high inflation is now. For now, I think dying with $5 million, or whatever the estate threshold is expected to be at the time, whichever is lower, sounds reasonable.
How To Decumulate Excess Wealth
Here’s an applicable way to decumulate excess wealth. It is most appropriate for those who’ve hit their financial independence number or who have retired. Remember, you are free to spend more or spend less whenever appropriate.
Take the difference between your annual expense multiple and the estimated years you have left. Multiply that figure by your ideal annual expenses. Then divide that figure by the remaining years you have left.
Let’s look at an example. A reader who recently contacted me has 55 years of annual expenses saved and roughly 38 years left to live, 55 – 38 = 17. His annual gross expenses are $135,000. So he should calculate 17 x $135,000 = $2,295,000. Then he should divide $2,295,000 by 38 (years left to live) = $60,395.
In other words, under these assumptions, he would need to spend an extra $60,395 a year or $5,032 a month to ensure he doesn’t die with an excessive amount of wealth.
To make sure you decumulate the right amount, run this formula at least once a year. Your expenses and your net worth are always changing.
I like this method of decumulation the best because it is the most realistic solution that doesn’t feel too drastic. This formula is based on the money you already have, therefore, it is more effective.
You can also simply increase your safe withdrawal rate in retirement as you see fit. But it becomes an even bigger guessing game as to which rate is best.
How To Decumulate Excess Wealth Part Two
Another way to decumulate your wealth is to calculate what your expected net worth will be when you die minus how much you want to leave when you die. You would then take that amount and divide it by the number of years left you plan to live and spend that much each year.
This formula is riskier because it is based on money you don’t already have. A lot can change over the years, including lower investment returns. However, playing around with the numbers at least gives you a rough estimate of how much you can reasonably spend a year, pre-tax.
For example, let’s say you want to die with $5 million. Your current net worth is $1 million and you plan to live for 45 more years. If you save $20,000 a year and return 5% a year on your entire net worth for 45 years, you will end up with $12,338,711. Subtract $5,000,000 from $12,338,711 to get $7,338,711. Now divide $7,338,711 by 45 (number of years left to live) to get $163,082.
To properly decumulate, you would need to spend about $163,082 a year starting this year while also contributing $20,000 a year to investments that return 5% a year for 45 years. See how this is a riskier strategy? most would wait until after they have $5 million before decumulating.
This formula is most relevant for those who are still working or who have not yet reached their financial independence number. Obviously, if you decide to spend less a year than what the formula spits out, then you increase your chances of dying with more money than you want and vice versa.
The Problem With Decumulation
There’s one big problem with decumulation. After decades, many of us are already satisfied with our spending and lifestyles. Therefore, decumulation may feel like a big waste of money!
Personally, I like our 7-year-old car and forever home. I could easily drive Moose for another five years given he only has 35,000 miles. Meanwhile, we plan to live in the home until 2038, or when our youngest potentially heads off to college.
We don’t need to spend more money on food because we want to maintain our body weight. In fact, we should probably spend less money on food to eat less. We’ve also budgeted our children’s educational expenses for the next 20 years. Any excess money left over in their 529 plans will be transferred to a new generation.
The most reoccurring “luxury” expenditure I have is buying new tennis shoes every 8-12 months. But, even the most expensive tennis shoes will only cost $160. Then I like to buy new rackets every three years, which now cost about $300 each strung. My softball glove and bat last forever.
Except for flying first-class and spending obscene amounts on family vacations, there aren’t any other possible big expenditures on our wish list. And do I really want to spend $120,000 to fly private to Honolulu from San Francisco and rent a beachfront property for $150,000+ a month? Only if I split the cost with another family or two!
Further, in order to decumulate, I may have to sell down assets and pay taxes. Sure, that’s what investing in a Roth IRA all those years is for, tax-free withdrawals. But, unfortunately, I don’t have a Roth IRA. It feels bad to sell down assets to pay taxes to buy things and experiences I don’t really need or want.
Therefore, if you’re already happy with your spending level, then the best thing to do would be to set up a donor advised fund (DAF) and donate your investments.
Make donating money to those in need the default beneficiary of your decumulation spending.
Spending More Money Won’t Make Us Happier
You’ve got to find your ideal spending number that makes you happy. Based on my experience living in expensive cities like NYC and SF, spending more than $150,000 a year per adult (~$200,000 gross income) doesn’t make me happier. As a result, I tend to save most of the overage if any.
There’s a study from 2012 that says earning more than $75,000 doesn’t bring more happiness. Thanks to inflation, that level is now about $100,000 today. I think $100,000 in annual spending, where there is no more additional happiness, is about right for the median household in America.
I’ve tried to spend more money on my parents, but they refuse to accept anything. They are also set in their ways. So that leaves helping my cousins, who don’t really keep in touch. Therefore, it’s time to reach out to my relatives on my mom’s side, whom I’ve lost contact with since we’ve been on other sides of the planet for decades.
Decumulation for us will center more on charitable giving. I also want to spend more time volunteering at the foster youth home I volunteered at pre-COVID.
Decumulation is tougher than it sounds. After a lifetime of building wealth, it feels uncomfortable to go in the other direction. However, we should try our best to consumption smooth for everybody’s own good.
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