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From accumulation to decumulation – the risks involved

27 November 2018

Accumulation to decumulation are two sides of the same coin but decumulation requires mitigation of specific and different risks, says Andrew Lewis, senior investment director, Brooks Macdonald.

“Generating an income for retirement” is a popular phrase, but ‘decumulation’ is a term that might make a lot of investors pause for thought. They are, however, two sides of the same coin: decumulation is simply the term used to refer to the stage in the client’s investment lifecycle when they begin to draw retirement income from their portfolio.

When investors move into their decumulation stage, their objectives change and they must overcome different risks. They therefore need specific investment strategies designed to meet their individual needs. In this article, we focus on two risks specific to decumulation, ‘longevity’ and ‘sequencing’, and look at the implications these can have.

Decumulation: withdrawing a regular and sufficient income

While some decumulation investors may want to draw down their portfolio’s capital in retirement, others may wish to leave it untouched and rely solely upon any income it generates. In any case, a decumulation investment strategy should seek to generate income and grow capital to guard against inflation.

The level of income that a portfolio is be able to provide depends on a number of factors, including its size and the target amount of capital to be left as legacy (if any). Over time, income levels will also be affected by market movements and volatility. As investors approach retirement age, they may wish to adapt their portfolio to ensure that they begin their decumulation journey with assets capable of generating their desired income requirements.

Decumulation investment risks

Longevity risk: This is simply the chance that the client will live longer than they expect! A successful decumulation strategy should account for the fact that a certain level of income may be appropriate today, but it may not be sufficient in 20 years’ time. [Click on the image to enlarge it]

Our research shows that a portfolios with higher proportions of ‘real’ assets (such as equities), growing faster than inflation, have higher probabilities of being able to sustain a given level of income over a specified time period.

Figure 2 shows that when drawing 5% of the initial investment value over 35 year time periods, from 1900 onwards, the greater the equity content the greater the probability that the capital lasts for the full 35 years.

Sequencing risk: However, as the equity content of a portfolio increases, so does its ‘sequencing risk’. This is the risk of withdrawing too much capital from a portfolio after a year of low returns, resulting in a detrimental impact to its potential longer-term capital value and, therefore, its ability to meet future income needs. The closer the year of poor returns is to the point at which income withdrawals are started, the greater the impact.

When investing for growth (accumulation), the order of discrete annual returns is of little consequence, with the important factor being the total return over the whole period. Figures 3 and show how three portfolios with the same annualised return, but very different discrete annual returns are affected when withdrawals equal to 5% of their initial values are made.

A decumulation investor’s requirement to withdraw an income every year effectively means that a portion of their portfolio is really a one-year investment. Therefore, and as demonstrated in Figure 5, a higher exposure to equities potentially exposes an investor to greater losses over shorter time periods, thus increasing their sequencing risk.

Empirical data shows that setting aside sufficient capital in cash and short-term liquidity instruments at the outset to cover seven years’ of the investor’s income requirements reduces sequencing risk and improves a portfolio’s chance of being able to provide a given level of income sustainably.


Decumulation investors often need to take a different approach to asset allocation as they have different objectives. This means that the traditional models used by accumulation investors may be inappropriate.

Decumulation cannot be solved with a one-size-fits-all approach and it is imperative that advisers and paraplanners have a robust understanding of the differences between the accumulation and decumulation stages, so that they can offer their clients strategies that are appropriate to their individual needs.


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