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Cracking The Nest Egg – Decumulation Strategies in Retirement

sunset years

I know you’ve spent some time thinking about accumulation of assets. How much thought have you put into your decumulation strategies?

This is a topic that I’ve covered in a post about my approach to a drawdown strategy, and that post led to about 20 physician and other bloggers writing on the same subject, all of which are linked at the end of the post.

This post originally appeared on The White Coat Investor.


Cracking The Nest Egg – Decumulation Strategies in Retirement


Physicians and other high-income professionals may spend 20 to 40 years accumulating money inside tax-free (Roth), tax-deferred, fully taxable accounts, and even cash value life insurance.

By the eve of retirement, many of them are quite well-versed in the advantages and disadvantages of the various types of savings, investing, and retirement accounts with regards to the accumulation of money. However, very few have given a great deal of thought to the process of actually spending the money.

It is not that they cannot think of vacations to go on, toys to buy, and grandkids to spoil. It is simply that they have not determined the best way to take their accumulated nest egg and, in a tax-efficient manner, ensure it lasts longer than they do while maximizing their ability to spend and the money they can leave behind to heirs and their favorite charities.

This article will discuss some of the main themes of the decumulation phase (as opposed to the much more straightforward accumulation phase) and give the individual investor some guidelines to determining how best to withdraw and spend his or her money.

Strategies For Decumulation in Retirement


Guarantee Your Needs With Annuities


An immediate annuity—particularly an inflation-adjusted immediate annuity—should play a role in the decumulation stage of most investors. Immediate annuities are similar to the increasingly rare employer-provided pension, whereby the employer pays you a certain amount every month in retirement until the day you die. Social Security is a similar form of an annuity.

Many investors are not aware they can purchase their own annuity from dozens of insurance companies. Basically, you take a lump sum of money and give it to an insurance company in exchange for a guaranteed payment every month for the rest of your life.

Since pensions, Social Security, and annuities are guaranteed, they allow you to spend more of your money each year. A good general guideline for how much of a balanced portfolio you can spend each year in retirement, while having a reasonable expectation that the money will last, is 4%. So a $1 million portfolio can be expected to provide an inflation-indexed income of about $40,000 per year. However, if you annuitize a lump sum at age 70, you can enjoy an income of over 8% on a nominal basis, or over 6% on an inflation-indexed basis. In short, by annuitizing, you can safely spend 50% to 100% more in retirement!

The basic concept here is that you guarantee your income needs using guaranteed sources of income like Social Security, a pension, or an immediate annuity. Then, you use your remaining portfolio of stocks, bonds, and real estate to provide for your wants,­ vacations, new automobiles, college money for the grandkids, charitable giving, and inheritances. Along these same lines, one of the best deals in annuities out there, at least for single people and the higher-earner in a couple, is to delay Social Security to age 70, at least if you enjoy good health.

Determining how much of your portfolio to annuitize can be difficult, but an honest assessment of your true spending needs should get you most of the way there. Also, be sure to consider the maximum annuity size your state insurance guaranty corporation will back in the event of insurance company bankruptcy. The guaranteed amount is state-specific, but typically in the $100,000 to $300,000 range. If you desire to annuitize more than this, you may wish to purchase annuities from more than one company.


How to Approach Required Minimum Distributions


A typical investor will arrive at retirement with a tax-deferred account, a smaller tax-free or Roth account, and a taxable investment account of some size. Prior to age 70, the investor can withdraw from each of these accounts in any manner he or she should so choose.

Beyond age 70, the investor is required to at least withdraw the required minimum distribution (RMD) from the tax-deferred account. This amount is as small as 3.6% of the portfolio at age 70 but rises to 5.3% at age 80, 8.8% at age 90, and 15.9% if you are lucky (or unlucky) enough to live to 100 years.

Just because you withdraw that money from the tax-deferred account doesn’t mean you have to spend it; you can always reinvest it in a taxable account.


sunset years
never to early to think about your sunset years


Who Do You Want to Pay the Taxes?


If your desire is to minimize the amount of taxes you pay during your lifetime, the best way to do that is to take only the minimum out of the tax-deferred account, and then spend from the tax-free account by borrowing from life insurance and selling taxable investments with a high basis (meaning they’re not worth much more than you paid for them) at the long-term capital gains rate.

However, your heirs would prefer that you choose to spend a little bit differently. The best asset to inherit is a tax-free account. Not only are there no income taxes due upon inheritance, but that account can be “stretched” providing decades of additional tax-free growth for the heir(s). Taxable assets are also a fantastic inheritance. Since the basis on the investment is “stepped-up” as of the date of your death, there are no income taxes due to the heirs on that inheritance.

Life insurance proceeds also make for excellent inheritances, although, given the low returns of cash value life insurance, the amount you leave behind is likely to be less than if you had simply used a taxable account in the first place. On the other hand, if they inherit a traditional IRA, all of that money is “pre-tax” and so every withdrawal from the account is associated with a tax bill.

If your goal is to minimize the overall tax bill due, a careful balancing act must be maintained.



Charitable Giving in Retirement


If charitable giving is a big part of your estate plan, you should also consider where that contribution should come from.

Charitable giving is a fantastic use of a tax-deferred account. When the charity inherits the IRA (or receives a distribution from it) neither you nor the charity will owe income taxes on that money. So if you have a $1 million IRA, you can either give your children $600,000, or you can give the charity $1 million.

Taxable assets are also a great charitable gift, especially for low-basis assets given during your lifetime, since you get the full deduction for the gift and the charity won’t owe any capital gains taxes on it.

Compared to a tax-deferred account, leaving a Roth to charity seems a waste.


State Taxes


Another benefit of decreasing the relative size of the tax-deferred account, either by spending or charitable giving during your lifetime, is that this account partially belongs to the government. But if the size of the estate is greater than the estate tax exemption amounts, the estate will owe estate taxes on both your portion and the government’s portion of the accounts.



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Cash Value Life Insurance


In general, I recommend against using cash value life insurance (such as whole life) as an investment and retirement account. Although it has certain asset protection, tax, and insurance benefits, these benefits cannot usually overcome the typical low returns and high fees associated with these policies.

However, if you own cash value life insurance, that money can be used for retirement spending, charitable giving, and perhaps most beneficially, as an inheritance for heirs. The key concept to remember is that during your life the cash value is borrowed from the policy in a tax-free, but not interest-free, manner.


Best Account
To Minimize Your Income Tax To Leave to Heirs To Give to Charity
1. Tax-Free 1. Tax-Free 1. Tax-Deferred
2. Life Insurance 2. Life Insurance 2. Taxable
3. Taxable 3. Taxable 3. Life Insurance
4. Tax-Deferred 4. Tax-Deferred 4. Tax-Free

Finding the Balance


Most investors are trying to find the right balance between maximizing retirement spending and the size of their bequests while minimizing taxes now and taxes paid by their family. A balanced strategy is likely to work best.

Delaying Social Security until age 70 and maximizing any employer-related pensions is a good first start. The next step is annuitizing sufficient tax-deferred assets (or exchanging life insurance cash value into an immediate annuity) to provide for basic needs not covered by Social Security and pensions.

Dividends, interest, and rents from the taxable accounts are added at this point. Then, take out the RMDs from the tax-deferred account. Beyond this, withdrawing from tax-deferred accounts up to the top of the lower tax brackets (10%, 15%, and perhaps even 25%) is a smart move. Then, sell taxable assets with a high-cost basis. If cash value life insurance was purchased, it can be borrowed tax-free (but not interest-free) at this point.

If additional income is needed, tax-free assets can be tapped or low-basis taxable investments can be sold. In general, the goal is for inheritances to be composed of as much tax-free money, taxable money and life insurance as possible, with the remainder of the tax-deferred account being left to charity.

For most investors, the decumulation strategy is going to be more complicated than the accumulation strategy, especially when it is combined with estate planning. However, like with anything in personal finance and investing, failing to plan is planning to fail.



What do you think? Did I miss something? How do you plan to decumulate your assets? Comment below!

[PoF: For my drawdown strategy, and a bunch of other personal finance blogger’s plans, please read on in Our Drawdown Plan in Early Retirement]


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35 thoughts on “Cracking The Nest Egg – Decumulation Strategies in Retirement”

  1. I’ve been working through this. My solution was to tax loss harvest like crazy when I could over the decades, accumulate a 2/3 post tax and 1/3 IRA portfolio during the course of my practice life time. My RMD therefore is not huge, but more than I want (already in the 22% bracket in year one of RMD) so I’m in the process of Roth converting. Roth conversion gives you the option of controlling your taxes once RMD hits, whereas if you don’t move money out of the IRA, RMD soon dominates your tax life. This is especially true if your or a spouse dies because it kicks your tax bracket up typically 2 brackets, a very important consideration.

    Roth conversion however constitutes a systematic SORR to the portfolio at the point of conversion in that the taxes must be paid. What I decided was to convert 2/3 of my IRA to Roth, before age 70, leaving 1/3, and my SS as annuity income liable the vagaries of future tax law. With a little help from my tax loss harvesting I can easily acquire enough money to live on tax free from post tax land, while devoting my taxes to only the portion being Roth converted. In other words if I live on $120K per year that money is pulled tax free from post tax money mixed with LT cap loss. I am therefore free to Roth convert all of my ordinary income coming from the IRA. I only pay taxes on converted money. My conversion occurs over the course of 4 years at which point I will RMD and claim SS. I analyzed 4 to 10 year conversion periods and for my situation 4-6 years was better than withdrawing 10 years of living expense. Longer conversions mean less overall taxes paid, but a bigger hit for living expenses.

    I did some analysis and we will claim SS step-wise. My wife is younger, so she will claim her SS at 62 and I will claim spousal benefits. When I am 70 (before she reaches full retirement age) I will claim my full benefits and she will continue with her SS until she hits full retirement when she will claim spousal benefits. When I die she will claim survivor benefits. This strategy adds quite a bit to net SS payout and easily pays for healthcare and more during our conversion period. One thing to be aware of is if you are on Medicare and your MAGI income exceeds certain “cliffs” even by $1 your Medicare cost can double or triple depending on your MAGI income. Google: “2018 Medicare Parts A & B Premiums and Deductibles”. For me this entered into figuring my upper limit conversion amounts. All of this matters since you can’t re-characterize any Roth conversions under the new tax law and miscalculating MAGI will kick you over the cliff.

    Survivor SS benefits are not trivial and add considerably to the ordinary income which is taxed at a higher rate when single. This strategy gives good control over taxes paid over 20-25 years of RMD. Eventually RMD once again dominates but by then you’re pretty close to being dead. Remember this tax law expires in 2025 but your RMD continues on no matter what at an accelerating rate till the IRA is empty. Who knows what the tax law will be after 2025? By doing a middle level conversion the systematic SORR is not too severe as opposed to a near total conversion. If you do a small conversion the systematic SORR is smaller but you don’t get enough out of the IRA to much affect RMD and RMD overtakes your taxes very quickly. It gives your spouse an optimized tax life after your demise, and heirs a nice present. One other strategy I’ve considered is to change survivor benefits on the IRA t o my kids which I may do if I live to be old and my portfolio is working as designed. This would eliminate some taxes from my wife who hopefully will have more money than she can spend and give the kids a little boost over a number of years while the IRA depletes.

    A good RMD calculator is Schawb’s RMD calc

    and a good tax calc for both single married over 65 and under 65 is taxplancalculator .

    A good FV calc

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  3. I don’t like annuity. I’ve heard a couple of horror stories so I’m completely turned off. Wouldn’t it be better to manage it yourself and buy municipal bonds or something like that?

    Decumulation is very complicated. I’m still young so I don’t have to worry about it yet. Once Mrs. RB40 retires, then we’ll start to rollover some 401k to Roth IRA. Hopefully, we can decrease the value down significantly before we need to RMD at 70.

    • Most annuities are insurance products meant to be sold, not bought, but the SPIA is one that does make sense for some. The Single Premium Immediate Annuity is a pension you can buy and is often recommended or at least presented as a reasonable option by trusted, unbiased authors I respect.


  4. 4% sustained withdrawal rate is a pretty good rule of them despite the criticisms of the Trinity study. I’m personally aiming for a 3.5% SWR with 75 Equity/25 Bond. It’s worth mentioning that Cooley et al created their SWR models based mainly on “corporate” bonds in their manuscript. I favor the Vanguard Total Bond Market Fund that actually has roughly 2/3 government bond representation. Also, if your portfolio is large enough, then one may not need 3.5% and diverting the excess into something safer may make sense.

    Agree with delaying SS withdrawal until 70 if possible. If I were a early career physician, I would be cautious on putting too much reliance on SS income. The logical evolvement of the social security issue will probably be extending the age of retirement (for SS benefits) and consequently the age at which maximal SS payments will be made (e.g. 72, 74, I have no idea, but the govt will have no choice if we keep living longer and longer).

  5. I didn’t see this mentioned, but I know that you (PoF) are a fan of ERN’s series on withdrawal rates and are well aware of sequence of returns risk. My thoughts were to use annuities for a short period in early retirement (ie. Age 40 to 50) when the sequence of return risk is greatest, then draw down assets on my own after that. Have you thought about something similar PoF?

  6. Most of the retiring physicians I know are taking SS immediately. I think you could do an analysis of when the break even point is: if you take it at 62 and invest it, how long before the lost 8 percent per year comes back and bites you? At 75?

    People are worried about means testing SS or higher taxes, which could foil the calculation. It’s a risk. You know, at 62, a bird in the hand…

    • It depends on what returns you use as a comparison, but to make it fair, it should be close to a guaranteed return — treasury bonds / TIPS. When doing so, the break even point is early-to-mid 80s. If you expect to outlive that number, you’re better off delaying. Spousal considerations can be huge, as well. There is certainly a lot to consider.

      My parents were encouraged to take it early in spite of excellent health and a family history of longevity. The recommendation came from an advisor paid via an AUM fee. As such, the advisor was incentivized to have them take Social Security and delay drawing down from the nest egg. So much for a fiduciary duty.


    • I’d recommend Mike Piper’s excellent Social Security book to aid you in this decision. I suspect he’ll convince you to wait until 70.

    • Something else to consider if you are not retired from working : If you take Social Security before your full retirement age, usually 67, your Social Security benefits will go down by one dollar for every two dollars you earn.

  7. Interesting post, but believe me is MUCH MORE COMPLEX than this. I spent two years before retirement trying to get a grasp on it, and still, after some time in retirement every day I learn something new.
    The advice to delay SS until 70 is right on the target, that’s the best annuity you can buy: Increases your income 8 % per year, give the chance to do Roth conversion and in the case you pass your wife would be happy to collect your SS. Buying a commercial annuity? No so sure, the rate are paying in the historical low, including both inmediate and delayed variety, instead get the money buy a couple of decent rental that pay close to the same rate, are adjusted to inflation (more or less) and the principal still there, of course are more labor- intensive , but heck you are retired by then.
    The 4 % rule is just an academic exercise , never intended to be followed. The withdrawal HAVE TO BE VARIABLE, and the there are hundreds of strategies .Another area to know to explore is the order of the different accounts to withdraw money, because is relevant taxwise, here the conventional wisdom of tapping money from TA, the TD and finally Roth fail also( that’s still the advice than Vanguard experts give).

    • The more you have and the lower the withdrawal rate, the less likely you are to fail. Every plan should be individualized as no two people will have the same portfolio.

      Interest rates are low, so fixed income instruments will be correspondingly low. Whether or not they might make sense for you depends on your risk tolerance and ability to tap other accounts. I’m not a big fan, but I can see the draw. You’re buying a pension.

      It’s best to think of SWR as a 4% rule of thumb. Flexibility is key. If the market tanks, most of us can find ways to spend less, earn something, or a combination on both. Roth conversions can play a role, as well as drawing from a 401(k) at 55 or from a traditional IRA at 59.5, to limit the impact of RMDs.


  8. Isn’t a pitfall with annuities that, in most cases, you give up the money when you and your wife die? At lease when keeping your retirement savings in an IRA, it’s passed on to your heirs.

    • Yes. The income may die with you, in fact. If you have a survivorship benefit, the return is adjusted lower.

      With an annuity, you’re betting the insurance company that you will outlive the actuarial table by a decent amount. Live to 100, you win. Die at or before your expected date of demise, you lose.

      With an IRA, you pass it on if it has a non-zero balance. The risk of running out of money is real, too. An annuity guarantees that won’t happen in your lifetime.


      • Do you think an insurance company would start killing off its annuity owners? So their CEO could make $10M instead of $5M?

  9. Thanks for re-introducing a great post from WCI. I never thought about the possibility of having a SPIA as an income source in retirement. SPIA’s seem like a good option for retirees in a more traditional age (late 50s, early 60s). Do you think it make sense for an early retiree in his/her 40s?

  10. You can beat the 4% rule by building out a solid portfolio of consistent dividend growers. It will take you a bit of extra time though. For example, I was able to invest almost $2M into a dividend growth portfolio of mostly blue chip stocks at fair to attractively valued entry prices. Less than 4 years later I’ve accumulated $230K of dividends and have an unrealized gain of about $180K. So the value of the portfolio is about $2.4M, this is in an after-tax account. My expected dividends this year is in excess of $85K USD so my yield on original cost (without counting the reinvested dividends) is 4.25% and this number will only keep growing year after year. Eventually the YOC will be in excess of 6% – 8% but this will likely be in another 5-10 years based on the track record for dividend payout growth (average growth is about 12% per year and that includes some additional fresh capital coming into the mix along with dividend reinvestment and dividend raises).


    • You can also beat the 4% rule 29 times out of 30 by using a total stock market fund with a 2% dividend and total return that has averaged about 7% real over many decades.

      The 4% rule accounts for retiring at the worst possible time in modern history.

      Clearly, with your portfolio that includes $2.4M in taxable, you’re in great shape. I’m a fan of total return and making your own dividend when needed, but I also get the appeal of mailbox money.


    • I agree with PoF that it makes more sense to focus on building a large nest egg then drawing down by selling a percentage of it after distributions instead of trying to build a high yielding portfolio. Mebane Faber has done some excellent research on the topic of dividend stocks and found that most of their outperformace over traditional market cap stocks over time has been due to their value tilt, and if you actually take all value stocks and remove the high dividend paying ones, you get BETTER total returns (makes sense, because these companies don’t use their money to invest in their own growth). I highly recommend reading this article:

      • Thank you for sharing. Interesting read. Sounds like a lot of work and analysis would be needed to track “value” stocks with no high dividend yielding participants in a portfolio (like what is suggested in the article) constructed for a mutual fund/ETF.

        The questions of this strategy would be a) would this be one of the 15% of the mutual funds/ETF that could beat a composite index in the short term (long term, the odds get worse) and b) be associated with a low expense ratio. If the answer is “no” or “uncertain” on either question, then stick with a broadly diversified portfolio with a low expense ratio. You will win the majority of the time.

        • Agreed. I’m not necessarily advocating such a strategy. It was more of a useful insight into the potential downsides to pure dividend investing. However, if one want to “beat the market,” focusing on value instead of dividend paying stocks (and there are a lot of value etfs out there with very reasonable fees), could be a reasonable strategy to allocate a certain percentage of your portfolio to, just as is often done with small value. The caveat is that there may be decades of underperformance before excess returns are realized, so it really should not be the only strategy in a portfolio.

    • Hi Mike H
      I have the same philosophy…Transition my present portfolio of high growth stocks($ 2M) into dividend paying stocks over the next 4 years ..Do you mind sharing which stocks you felt comfortable investing in?
      With valuations being high now,I have a list of stocks like T,VZ,MO etc.. Anything that I am missing?

  11. As you said, the strategy will be different for each person, and the mix of their asset classes. I have thought about this too, I will have a pension worth about 90k in todays dollars if I retire around 54. Plan is a mix of taxable invests and probably some part time or other income to cover expenses until 60. Then I will have a sizable tax deferred mixed with tax free account (TSP) that I want to pull from to avoid too big a RMD at 70, where social security will kick in for me and one year later for my wife. I will have backdoor Roth accounts that could lessen taxes in my 60’s, but do not want to be facing huge taxes in my 70’s with pension, SS and RMD’s.

  12. I assume money put in an annuity is after-tax, so are there any tax ramifications as the annuity pays out? I’d imagine not.

    • No, annuity payments are not taxable if you “buy” one with ALL after-tax dollars.
      I just “sold” my Variable Annuity for a 7 yr period certain to bridge the time between now and when I hit 70 and max out SS which will then take it’s place.
      About 1/3 of the balance were capital gains, but these are treated like regular income since they grew tax-free for the last 10 yrs. So, of my monthly “paychecks” 1/3 will be treated as income and taxable as income and 2/3 is “tax free” (the tax was paid when I earned the money years ago and put it after-tax into the variable annuity).

      • I don’t think that’s true. If bought with tax-deferred money, all pay-out is taxable. If bought with after-tax money, only some of the payout is. But I think the only way to get the payout completely tax-free is to buy it in a Roth account (which I wouldn’t recommend.)

  13. Great thoughtful post. As dizzying as it can be to decide how to accumulate, I find the spend down to be just as complicated and anxiety provoking. This helps!

  14. I agree that this part is infinitely more complicated than accumulation. I look forward to learning about all of these topics in more depth over the next couple of years.

    The annuities seem like an interesting idea because I bet that feels like a pay check since you are given the same amount each month … Which would help retirmeent spending to feel more like spending during your career. Extra money coming from other assets to pay for trips and such. I like that idea a lot.

    Thanks for this post, I have been thinking about these topics a lot lately. It does seem that your accumulation phase should he thought out with a plan for how your decumulation phase is going to pan out. They are linked it seems. And is one of the reasons I contribute more to ROTH money than most would recommend.

    Thanks for the thought provoking g post, POF.

    • I’m skewed a lot toward Roth contributions, myself. The concept of a stretch IRA appeals greatly to me as far as leaving a legacy to those after me.

        • Philosopher,
          From your previous comments it seems you are young. When our government’s debt is really out of hand 20 years from now, some politicians will see those billions of dollars in those Roth accounts and will demand that those rich Roth owners “pay their fair share”! Don’t be surprised when they change the rules.

        • Mark, tell me how you think that same politicians will treat your pre-tax contributions when they come out? Do you think the tax brackets would look better or worse in that situation? What about inflation? Better or worse?

          The thing is that none of us know how this will play out and have to use the rules we are given now.

          I am half pre-tax and half Roth in my contributions. So, it seems I am going to be equally prepared for whichever one they choose to attack. If they attack both, we are all in the same boat.

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