A Strategic Take on Decumulation

Decumulation — actually tapping into funds set aside for retirement — garners less attention than accumulation. But a recent article takes a look at that lesser-explored aspect of retirement funding and argues for a strategic approach.
 

In “Bridging the Retirement Gap: Crack the Nest Egg Before Taking Social Security,” an article by David Morse, Editor-in-Chief of K&L Gates’ Benefits Law Journal, argues that retirees should draw from their defined contribution plan accounts, IRAs or other accounts before claiming Social Security benefits. In a nutshell, says Morse: “Hiding in plain sight is a simple, low-cost, and effective tool to meaningfully increase retirement income: newbie retirees should live off their 401(k), individual retirement account (IRA), or other savings and delay taking Social Security, ideally until age 70.”

Each year that one delays claiming Social Security benefits, Morse observes, the benefit increases in value by approximately 8%, plus indexation for inflation. This, he argues, amounts to the rough approximation of an annuity.
 

In addition, Morse says, such a strategy offers the added advantage of flexibility — the decisions about what benefits to take and when can be changed. “If the retiree’s health, financial, or other circumstances change, he or she can simply start Social Security payments and stop or modify the 401(k) withdrawals,” he writes. Further, he argues, the growth in the value of Social Security benefits is stronger than that of benefits one can realize from insurance; in addition, Social Security benefits do not incorporate the fees that insurance coverage does. And, he says, such a strategy offers simplicity.
 

Employers’ Role  
 

Morse suggests that employers can play a role in making participants aware that they can follow such a strategy. “Employers should educate, and perhaps encourage, near retirees to consider this approach,” he writes. He observes that many employers already educate employees about Social Security, especially as they approach an age at which they may want to start claiming it, and suggests that employers could adjust those discussions and presentations of information. In addition, he says, employers could provide estimates of Social Security benefits those near retirement would receive, based on payroll data, and offer to help them to obtain the exact data.
 

A Caveat
 

Morse does acknowledge that delaying Social Security is not a panacea and would not be ideal for everyone. For instance, he says, those (1) with health problems; (2) whose lifespan may not be as long as others’ and (3) with little savings and need to build their resources and not tap into them for daily expenses may want to not delay taking Social Security benefits.