Decumulation and the three Ds

Judith Davey

In a previous blog I mentioned the current Review of Retirement Income Policy. Among its terms of reference is the requirement to look at “decumulation and how retirees manage their assets”. Decumulation – it is not even in my Shorter Oxford Dictionary or thesaurus. The nearest term is “decumbiture” which means taking to one’s bed! Webster’s, as usual is more up to date and calls it the “disposal of something accumulated”. It is an important consideration for people in retirement.

What does decumulation mean in the context of retirement?

Economists have a model, supposedly reflecting rational action, which shows people accumulating assets throughout their working lives and then “decumulating” in retirement, using up their wealth before they die. Does this reflect actual behaviour? Do the last few dollars pay for the trip to the cemetery ? As someone once said to me; “There are no roof-racks on hearses”. Why is behaviour and financial planning less than rational? For several reasons – procrastination is a big one; time-cost and hassle. Many people prefer not to contemplate eventualities such as the need for long-term care and death.

Uncertainties make it difficult to plan.

Uncertainty about longevity
People do not know how long they are going to live. Life expectancy at birth is lower than life expectancy at 65, as not everyone survives to that age. How long must capital last and how much is needed to provide a retirement income and support an acceptable standard of living?

Uncertainty about needs
How will needs change in retirement and what costs might increasing frailty bring? This question encourages people to keep their resources for a “rainy day’. Will children be willing and able to provide care? What will the state provide and at what cost to me? The elective surgery system may not respond in a timely manner and the cost of dental care, hearing and eye-sight aids can be very high.

Uncertainty about the adequacy of New Zealand Superannuation (NZS)
Can we rely on this as we look to the future?

The wish to bequeath
Attitudes to inheritance have a huge influence on whether or how people decumulate. If we are keen on leaving a substantial amount to our children then we will be unwilling to make inroads into our assets. On the other hand, I have found in my research that many older people agree that their children are comfortable and don’t need to inherit; that it is better to use their assets to help them in their old age (referred to in a June 2014 blog).

Effective management of income and assets in retirement

The second D is “Decisions” with the emphasis on making good decisions.

Planning to provide an adequate level of income for retirement requires an understanding of a number of relatively complex variables and their interactions. Some of these may be certain or controllable, such as retirement age, superannuation contribution rates or investment strategy. Others are uncertain and not directly controllable including lifespan, level of health and accrual investment returns [1].

We have to understand these variables. Then we have to explore our options (which I will look at in a later blog). Then come the decisions. And what do we need to make good decisions?

Financial information and education
There are few opportunities for New Zealanders in or approaching retirement to improve their financial literacy or to prepare in other ways for later life.

Better advice on financial management
There is information on web-sites, such as, and the Consumer Institute publishes articles for people seeking financial advice. Information backed by trusted community organisations and interest groups representing older people is likely to be more influential than information which might be commercially slanted.

Better consumer protection
Older people may be vulnerable to “hard sell”, bemused by technical complexity and drawn in by the promise of high returns, as seen in recent years. Many have been taken in by professional advisers and suffered financial loss. This emphasises the importance of policies to improve consumer protection.

Protection against financial abuse
Older people often do not report financial abuse because they are embarrassed, especially if the perpetrator is a family member, which is often the case (see blogs in second half of 2014). New Zealand elder abuse services have difficulty coping with demand and providing adequate coverage throughout the country. We need to develop effective prevention and intervention in this field.

The third D – Diversity

There is a huge diversity in the expectations and attitudes of older people – towards retirement and towards how they want to use whatever financial assets they have available. These attitudes will vary over time, subject to a wide variety of influences, not least a lifetime of experience. Should people expect the same standard of living in retirement as they have had in their working lives? In the past, reduced living standards in old age were seen as inevitable. Now and in the future, expectations may be higher. Older people are fitter and keener to maintain active lifestyles which generates a demand for higher incomes. Decisions on decumulation may determine whether we can realise such expectations in all their diversity.


[1] Blight, P. and Longden, D. (September 2007) The next generation retirement income streams. Paper presented at the Institute of Actuaries of Australia Biennial Conference, Christchurch, New Zealand.

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