My monthly column at Physician’s Money Digest is on the decumulation stage. Here are some samples from the article:

Physicians and other high-income professionals may spend 20 to 40 years accumulating money inside tax-free (Roth), tax-deferred, fully taxable accounts, and even cash value life insurance.By the eve of retirement, many of them are quite well-versed in the advantages and disadvantages of the various types of savings, investing, and retirement accounts with regards to the accumulation of money. However, very few have given a great deal of thought to the process of actually spending the money.

It is not that they cannot think of vacations to go on, toys to buy, and grandkids to spoil. It is simply that they have not determined the best way to take their accumulated nest egg and, in a tax-efficient manner, ensure it lasts longer than they do while maximizing their ability to spend and the money they can leave behind to heirs and their favorite charities.

David Denniston Ad # 2The first part of the article discusses the merits of using a SPIA as part of your withdrawal strategy.

An immediate annuity—particularly an inflation-adjusted immediate annuity—should play a role in the decumulation stage of most investors. Immediate annuities are similar to the increasingly rare employer-provided pension, whereby the employer pays you a certain amount every month in retirement until the day you die. Social Security is a similar form of annuity.Since pensions, Social Security, and annuities are guaranteed, they allow you to spend more of your money each year. A good general guideline for how much of a balanced portfolio you can spend each year in retirement, while having a reasonable expectation that the money will last, is 4%. So a $1 million portfolio can be expected to provide an inflation-indexed income of about $40,000 per year. However, if you annuitize a lump sum at age 70, you can enjoy an income of over 8% on a nominal basis, or over 6% on an inflation-indexed basis. In short, by annuitizing you can safely spend 50% to 100% more in retirement!

The basic concept here is that you guarantee your income needs using guaranteed sources of income like Social Security, a pension, or an immediate annuity. Then, you use your remaining portfolio of stocks, bonds, and real estate to provide for your wants,­ vacations, new automobiles, college money for the grandkids, charitable giving, and inheritances. Along these same lines, one of the best deals in annuities out there, at least for single people and the higher-earner in a couple, is to delay Social Security to age 70, at least if you enjoy good health.

Later in the article I discuss what to use each type of account for with regards to retirement spending and estate planning. Those of us in the accumulation stage are aware of the benefits of tax diversification, but this discusses how to benefit from that tax diversification once you’re retired.

Best Account

To Minimize Your Income Tax

To Leave to Heirs

To Give to Charity

1. Tax-Free 1. Tax-Free 1. Tax-Deferred
2. Life Insurance 2. Life Insurance 2. Taxable
3. Taxable 3. Taxable 3. Life Insurance
4. Tax-Deferred 4. Tax-Deferred 4. Tax-Free


Then I wrapped it up with some general recommendations:

Delaying Social Security until age 70 and maximizing any employer-related pensions is a good first start. The next step is annuitizing sufficient tax-deferred assets (or exchanging life insurance cash value into an immediate annuity) to provide for basic needs not covered by Social Security and pensions.Dividends, interest, and rents from the taxable accounts are added at this point. Then, take out the RMDs from the tax-deferred account. Beyond this, withdrawing from tax-deferred accounts up to the top of the lower tax brackets (10%, 15%, and perhaps even 25%) is a smart move. Then, sell taxable assets with a high-cost basis. If cash value life insurance was purchased, it can be borrowed tax-free (but not interest free) at this point.

If additional income is needed, tax-free assets can be tapped or low-basis taxable investments can be sold. In general, the goal is for inheritances to be composed of as much tax-free money, taxable money and life insurance as possible, with the remainder of the tax-deferred account being left to charity.

Read the entire article, then come back and tell me what you think. Did I miss something? How do you plan to decumulate your assets? Comment below!