Accumulation V. Distribution

A lot of people listen to Warren Buffet when it comes to investing. His ideas and strategies are great for those building their wealth like him. He has never retired despite the fact that he will turn 90 years old this year. It also doesn't hurt to have nearly $90 billion. But for the rest of us, we have to realize that there are two investment phases in our lifetime. The first being the accumulation phase. This phase occurs when we are working and contributing to the retirement plans that we will depend upon when we decide to retire. The second phase, which is called the distribution phase, is when you decide to retire and support yourself with the money you saved and invested over the years. The distribution phase requires different strategies to mitigate the possibility of running out of money or having to drastically reduce your lifestyle as you age.

In the distribution phase there are three pillars of income. They include your investments and 401(k)/IRA, Social Security, and, in some cases, a pension. The objective is to replace your earned income with these pillars so that you can continue living a similar lifestyle in retirement. 

When looking at the differences between the accumulation and distribution phases a significant factor is how you allocate your investments. In the early years of the accumulation phase an allocation close to 100% stocks is preferred because of the long time horizon you have until you will need to draw on your investments. But as you age the allocation between stocks and bonds should change. When you start to get close to the distribution phase (5-10 years out), your allocation should shift increasingly to bonds to dampen volatility and serve as a future source of regular income. NOTE: Social Security acts like an annuity that pays you a monthly income for the rest of your life with a Cost of Living Adjustment (COLA). As a result, it should be considered as a stable “asset” when designing your asset allocation plan.

Another difference is that during the accumulation phase there is no need to rebalance your portfolio since new contributions can be used to accomplish it. During the distribution phase rebalancing becomes a more complex issue because you are taking money out of your accounts. That is why it is important to hold a larger portion in safe assets, such as bonds, that will remain more stable and serve as a resource for buying stocks when their prices decline (which we all know will happen). The inverse is also true. When stocks earn sizable returns, as they did in 2019 and early 2020, it is important to take profits to fund future withdrawals by rebalancing towards bonds. Another benefit is the income that bonds will generate to further aid your withdrawals. 

The last and the most important difference between investing during the accumulation and distribution phases is behavior management. People in the accumulation phase tend to worry less about dips in the market as they have current earned income and are not in need of funds from their 401(k)’s or IRA’s. They also tend to have less free time to manage their accounts since they are busy with work, building a family, or furthering their education. During the distribution phase this all changes. You no longer have earned income and the future is already here. Market swings take on greater importance since you need the money in your retirement accounts to meet current and not so distant needs. Avoiding overreactions to market gyrations is paramount. Many times an investor feels as if they need to do something when volatility raises its ugly head. The better option is to have a strategic plan in place to avoid making short-term decisions that will have long-term negative impacts. Refer to the Investor Behavior Gap blog for more information.

Your asset allocation, diversification strategy, rebalancing tactics, and behavior management become much more important during the distribution phase and will require a greater level of care. A Certified Financial Planner professional that has experience managing clients assets during the distribution phase and has the necessary skills to help navigate both financial planning and wealth management challenges may be helpful.