Accumulation, deaccumulation and the importance of setting realistic savings goals

November 2024 by André Themudo

Saving and managing personal finances responsibly are fundamental decisions throughout one's 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 security needed to meet unexpected expenses that may arise over time.
However, the work doesn't stop when you retire. Just as you manage your savings during your life with investment portfolios that make a return on your savings, in retirement it is essential to change your focus and move to a strategy of deaccumulation. This transition is just as important as the savings phase, since the intelligent and appropriate management of accumulated resources can make the difference between living 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 objectives.  
Throughout your working life, it is essential to understand the importance of setting realistic savings goals and constantly working towards them. This not only means saving money regularly, but also ensuring that those savings grow through well-managed investments. When it comes to retirement, the strategy changes, and it is important that the use of accumulated funds is efficient in order to maximize the duration and ensure that the desired lifestyle is maintained without prematurely depleting resources. 

Sustainability of pensions

The sustainability of pensions is currently challenging and we consider it more important than ever to think about and plan for this process of accumulation and deaccumulation. On the one hand, the ageing of the population means that the increase in average life expectancy also increases the deaccumulation 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 deaccumulation stage.

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

The various deaccumulation strategies

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

• Annuities: these provide stable income streams and help mitigate longevity risk (living longer than the duration of savings). However, in Spain they are underutilized due to the lack of strong incentives for private saving 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: these allow homeowners to convert part of their real estate capital 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 withdrawal: these allow savings to be withdrawn at the desired rate, which offers flexibility, but requires careful financial planning to avoid depleting savings too soon. 

This challenge of renewing deaccumulation represents an opportunity for financial entities to offer solutions such as creating 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.