Accumulation, de-accumulation and the importance of setting realistic savings goals

November 2024 by André Themudo

Saving and managing personal finances responsibly are fundamental decisions throughout your professional life. Accumulating resources during your working years and planning how to use them in retirement are essential steps to enjoying a peaceful and secure retirement. The ability to save and manage these savings not only maintains the desired standard of living, but also provides the necessary security to face unexpected expenses that may arise over time.
However, the work doesn't stop when you retire. Just as savings are managed during life with investment portfolios that generate returns on savings, in retirement it is essential to change focus and move to a decumulation strategy. This transition is as important as the savings phase, since intelligent and appropriate management of accumulated resources can make the difference between enjoying a smooth retirement or facing financial difficulties. For this reason, it is essential to start planning as early as possible and to have professional guidance to help design a retirement plan adapted to personal needs and goals.  
Throughout your professional life, it is essential to understand the importance of setting realistic savings goals and constantly working towards achieving them. This not only involves saving money regularly, but also ensuring that those savings grow through well-managed investments. When it is time to retire, the strategy changes, and it is important that the accumulated funds are used efficiently to maximize the duration and ensure that the desired lifestyle is maintained without prematurely depleting resources. 

Pension sustainability

Currently, pension sustainability is facing a challenging context and we consider it more important than ever to think about and plan this process of accumulation and de-accumulation. On the one hand, the aging of the population means that the increase in average life expectancy also increases the decumulation period. On the other hand, an inversion of the population pyramid in developed countries, where fewer people are entering the labor market than leaving it, creates a perfect storm to rethink the importance of the decumulation stage.

In Spain, for example, regulatory changes are being introduced, such as the way public pensions are calculated, including adjustments to retirement age and contribution periods. And private pension plans offer tax advantages, although there are limits on contributions. This makes the penetration of private pension and savings plans relatively low compared to other European countries, which creates opportunities for the creation of investment solutions and financial products dedicated to decumulation.

The various decumulation strategies

There are already several decumulation strategies commonly adopted by investors and savers: 

• Annuities: provide stable income streams and help mitigate longevity risk (living longer than the life of your savings). However, in Spain they have been underutilized due to the lack of strong incentives for private savings for retirement and a context of historically low interest rates. Annuities can be a good option if you want a guaranteed income for life, but it's important to know their terms and conditions before committing. 
• Reverse Mortgages: allow homeowners to convert part of their home equity into income without having to sell their home. This is a relatively unexplored market. Reverse mortgages can be a good option if you have significant real estate assets and want to supplement your retirement income without selling your home.
• Pensions with flexible redemption: allow you to withdraw savings at your desired pace, which offers flexibility but requires careful financial planning to avoid depleting savings too early. 

This challenge of renewing decumulation represents an opportunity for financial institutions to offer solutions such as the creation of personalized investment portfolios, balancing income generation with capital preservation, offering a combination of bonds, shares and other assets that can provide a stable source of income, minimizing volatility and mitigating longevity risk.