Lesson 3 of 3 · 5 min read
Decumulation: what you do with the money once you have arrived
Accumulation has clear rules (save, invest, wait). Decumulation, meaning how to draw money without running out, is discussed less, but it is just as important.
Decumulation is the phase where, instead of adding money to a portfolio, you start drawing from it to cover your living costs, whether at classic retirement or on reaching early financial independence.
Sequence-of-returns risk
A risk specific to the decumulation phase, less relevant during accumulation, is “sequence-of-returns risk”: a sharp market fall in the very first years of withdrawals can hurt the portfolio's durability far more than the same fall arriving later, because you are withdrawing fixed sums from capital that is already reduced, speeding up its depletion.
Why this matters early
People close to the decumulation phase often gradually reduce their exposure to very volatile assets, precisely to limit this risk. It is a planning decision, not a panic reaction.
General decumulation strategies (educational)
- A fixed percentage withdrawal (for example the classic 4% rule): simple, but it can produce variable yearly income.
- A withdrawal adjusted to the portfolio's performance: more flexible, and it reduces the risk of quick depletion in weak market years.
- Combining with the pension pillars (1, 2, 3): for many Romanians, real decumulation combines a personal portfolio with income from the state and private pension systems.
Legal note
These strategies are described strictly for education. Planning your personal decumulation benefits significantly from a talk with an authorised financial adviser, especially close to the actual moment of withdrawal.
In short
- Decumulation has its own risks, different from the accumulation phase, especially sequence-of-returns risk.
- Gradually lowering the portfolio's risk toward the end of accumulation is a common planning practice.
- For many Romanians, real decumulation combines a personal portfolio with the pension pillars.