How advisors can help frugal retirees finally enjoy their savings

Many retirees struggle to withdraw money from their retirement accounts to cover living expenses, fearing they'll run out. But a well-structured decumulation plan can balance lifestyle goals with essential expenses and turn their nest egg into sustainable retirement income.

Two financial professionals recently shared a few decumulation-planning strategies they use with clients.

Hunter Lord, a six-year Million Dollar Round Table member and a financial advisor at Essential Planning, said that one key aspect of his firm’s decumulation planning is an "Order of Withdrawal" study.

“While it's important to confirm how much can be withdrawn in retirement and how to invest for decumulation, where you actually get the funds for your retirement income is critical to nail down,” he said. “It has everything to do with taxes and trying to pay the least amount of tax possible."

Lord added that most retirees have different investment accounts with different tax consequences; his firm lays out the exact order to tap these accounts to provide the most tax-efficient drawdown.

“We also look for years with lower income to execute strategic Roth conversions, minimizing their lifetime tax burden and maximizing what they get to keep,” he added.

Additional decumulation strategies

Kyler Spencer, a six-year MDRT member and wealth advisor at FSM Wealth, said his generation grew up on apps that automate everything, and he tries to bring that to retirement's decumulation phase.

He added that the goal is to make a seven-figure portfolio feel as simple as a direct deposit. But the biggest shift is always psychological. Clients spend 40 years saving and then often struggle to spend because they fear running out of money.

“The simple idea,” he said, “is to rebuild their paycheck with an automated monthly ‘retirement salary,’ while for the most part keeping the portfolio invested so it can keep working for them.”

At the start, Spencer said, he and his clients work together to set spending guardrails so that the clients know ahead of time when they can give themselves a raise and when it is time to tighten up. This often means spending more in the active early years.

It can also make sense to use the low-tax years before Social Security and required minimum distributions for strategic withdrawals and Roth conversions, often drawing more from the portfolio early so that clients can delay Social Security and lock in a larger lifetime income.

“Ultimately,” he said, “a good decumulation plan gives people permission to enjoy what they built.”

Spencer added that a saying everyone has heard, but that clients find funny coming from a financial advisor: "You can't take it with you." Spencer said he makes this statement only to clients who spend on the low side.

“The idea is to give them the confidence, encouragement, and quite frankly the bravery to spend their portfolio, despite market cycles or short-term corrections,” he said.

Spencer also shared the following strategies:

• Hire your portfolio. “Decumulation doesn't have to mean someone watching the balance shrink,” Spencer said. One concept he uses is to show clients the actual income their portfolio produces (interest, dividends, etc.) and explain that their portfolio is essentially an employee who now works for them.

“We set up an automated monthly or semimonthly ‘retirement salary’ into checking so retirement feels like the payday they were accustomed to,” Spencer said. “Because the portfolio stays invested, a well-built plan can often sustain or even grow the balance in good markets, while it funds spending.

"The real risk is sequence of returns: A bad market early in retirement does far more damage than the same drop 10 years in. So, we keep a cash reserve and pull from whatever is up, not whatever is down. We also stress-test income plans with a Monte Carlo simulation in our financial planning software, which gives clients a level of comfort knowing that their plan holds up, even in tough market scenarios.”

• Guardrails and front-loaded spending: client expectations. Spencer said that, from a psychological standpoint, he tries to learn from clients what they still want to do in life.

“Are there things they've been putting off?” he asked. The obvious thought is often about material things, but he encourages his clients to spend money on experiences, since those often give the highest return on investment. Clients should often spend more in their early and active years, when health and energy allow for travel and experiences.

“We set a spending range with pre-agreed triggers and keep an open dialogue with clients about the flexibility of their spending and lifestyle,” Spencer said. Sometimes a raise after strong years is warranted, and a modest trim after weak ones may be responsible, but scaling back is much harder than scaling up.

The real conversation, he said, is about expectations. “How much do you realistically consume, and how willing are you to adjust if markets don't cooperate?” Spencer asked. "A client whose main living expenses are covered by a guaranteed income has a much higher degree of freedom when it comes to consumption and using their portfolio for larger one-off costs, such as a new vehicle.”

- Use the gap years as part of the drawdown strategy: Location vs. allocation. Which account a client draws from matters as much as how much they are drawing, Spencer said. The years between retirement and Social Security or RMDs are often a client's lowest tax years. The goal is to fund living expenses from the right mix of taxable and pretax accounts in those years and layer in partial Roth conversions to fill the low brackets.

“That makes every future withdrawal more tax efficient,” he added. “It can shrink future RMDs, reduce Medicare surcharges, and create a tax-free bucket for later in retirement. The key thought is showing clients that if we are smart from a tax standpoint, they will have more flexibility in spending later down the road.”

- Social Security as longevity insurance. When the portfolio can handle it, Spencer said he often has clients take higher early withdrawals so they can delay claiming Social Security.

They're spending down assets to buy a larger, inflation-adjusted income that lasts as long as they do. At first, this can be a tough concept to get clients on board with, but they almost never regret it once they start collecting a much higher amount.

“Longevity, of course, always plays into these calculations; so, it’s never a one-size-fits-all,” he said.

- Permission to spend. Spencer said that this is probably the most important part of his job. Clients, he added, spend 40 years in building the habit of saving, and that identity doesn't switch off at retirement. Many underspend out of fear, even when the plan says that they can afford more.

“Showing them a clear, safe spending number gives them permission to enjoy what they built. The math is the easy part, really; it’s the psychology part that is so important to understand,” he said.

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