Differentiating between Accumulation and Withdrawal phases

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Flaccidsteele
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Differentiating between Accumulation and Withdrawal phases

Post by Flaccidsteele »

I read the following quote in the most recent thread:
ghariton wrote:Remember that FWF is just as good a source of advice in the withdrawal phase as in the accumulation phase.
In the past, every time a poster mentioned the "withdrawal" or "accumulation" phase, I didn't give it much thought. I had a vague generalized idea of these phases, but for whatever reason, this time around I started thinking about these 2 phases and what they really mean.

I had first assumed that the accumulation and withdrawal phases occur serially. That is, an individual starts creating capital and begins to accumulate capital/assets. After some period of time, they stop accumulating and then they begin to draw down all that they've accumulated until they pass.

What happens if the accumulating doesn't stop? Do individuals automatically enter the withdrawal phase in spite of this?

Let's say that a retired investor requires $100k a year on needs and wants (e.g. food, shelter, vacations, charity, stuff, etc.)

In the first scenario, if they had a net worth of $5m that throws off 4% in dividends or $200k a year, then is this the "withdrawal" phase? Or is it still the accumulation phase because their net worth continues to climb (albiet at a slower rate)?

In a second scenario, what if this same retiree had $5m and had no dividends, but was employing Buffett's sell-off approach. Technically, the retiree is selling their amassed portfolio in order to sustain themselves, but can this really be called a withdrawal phase if their wealth continues to grow? Is it only a withdrawal phases when their net worth declines?

In a third scenario, let's say an individual had build up a real estate portfolio that, upon retirement, produces $200k per year in rental income but their net worth stayed flat. Would this person be in withdrawal mode as well?

From my perspective, all these individuals are all still in accumulation mode. That is, their net worth continues to grow. However, perhaps they can also be considered in withdrawal mode because they're no longer actively amassing capital/assets?

Thoughts?
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Re: Differentiating between Accumulation and Withdrawal phas

Post by ig17 »

If you are wealthy enough, the lines between accumulation and withdrawal phases are blurred. This is a trivial idea. Not sure what is there to discuss.

It's a nice position to be in. From financial planning perspective, it doesn't pose any real challenge.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by ghariton »

As far as I'm concerned, the accumulation stage is when a person is still earning labour income, i.e. generating income from human capital (salary or proprietorship). Withdrawal stage is when a person is living off interest, rent, dividends, capital gains, or return of capital, i.e. generating income from financial capital.

There is a gray area when a person is working part time, earning some labour income, but not that much.

According to this distinction, it doesn't matter whether net worth is increasing, decreasing, or staying constant.

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Re: Differentiating between Accumulation and Withdrawal phas

Post by deaddog »

I considered myself to be in the withdrawal phase when I no longer had any income from any thing but my investments. I just happened to occur on the same day I quit being employed.

Since I left the world of the employed I have managed to spend more than I was earning as an employee and have also doubled my net worth so in reality I suppose I am still accumulating.

I live for the most part off my realized gains from actively trading. I guess you could call it the deaddog sell off approach.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by StuBee »

Withdrawal phase is that period where an individual is dependant on his portfolio for ongoing needs and will be drawing funds away for this purpose. Pure accumulation exists when the entire portfolio is dedicated to growth and nothing is being withdrawn. Pure withdrawal exists when nothing is dedicated to growth and all is being withdrawn. Obviously, in this sense, pure withdrawal does not exist (unless the entire portfolio was cash or FI with no real growth and it was being progressively withdrawn).

So, there are only two "stages": "Pure accumulation" and "a mixture of accumulation and withdrawal". When withdrawal predominates (for instance a smaller portfolio and later on in life) it would be proper to call this stage the withdrawal phase. If accumulation predominates (for instance a larger portfolio at the beginning of retirement) it would still be proper to call this the withdrawal stage if there is no other provision of needs apart from the portfolio.

In my case, I have been withdrawing from my portfolio for about 5 years (RESP withdrawals and any excess income above TFSA and RRSP contributions). However, up until now, my earned income has been the major source of needs provision. I therefore (up until now) have continued to see myself as "in accumulation" though in reality it was a mixture of accumulation and withdrawal where accumulation predominated.

As of 2015, I will be working "only" about 3 hours per week. Therefore, I will continue to have earned income. However, this earned income will be very far from sufficient for needs provision. I will therefore be dependant on my portfolio for my sustenance. For this reason I consider myself in the "withdrawal phase".

Though this has never been my case, An individual who is unemployed for an extended period of time, for whatever reason, can be considered for that period of time as being (temporarily) in "a" withdrawal phase (though perhaps not "the" withdrawal phase).
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Re: Differentiating between Accumulation and Withdrawal phas

Post by SQRT »

Seems simple enough to me although, there may be several "degrees" of withdrawal as mentioned earlier.

My thinking is that the withdrawal phase means you aren't adding new capital. Your portfolio can still increase if the market gains are greater than the withdrawals. This would be the case for most people during the last few years. I also have a pension which we spend. I guess if I added a portion of my pension each year to the portfolio, I could view myself as being in the accumulation phase still. But this isn't going to happen. How the portfolio generates "spending" is of no matter.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by OnlyMyOpinion »

No rocket science here unless someone wants to redefine the conventional meaning of this term. That meaning and its variations have been noted above - it is not a simple on/off switch. We are now two days into the 'decumulation' phase, but expect to die with a much higher value in our investment account since expenses will be largely covered by cpp's, rrif's, and lif.
I think Jonathan Chevreau has popularized this term in his writings. The Decumulation Institute was recently formed http://www.decumulation.ca/. Perhaps useful, or perhaps to 'scoop' some of the value of all those senior savings through the financial services industry?
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Re: Differentiating between Accumulation and Withdrawal phas

Post by steves »

I don't acknowledge a 'retirement age'. There are periods of time when more money is coming in than can be spent (accumulation) and periods when not enough is coming in (withdrawal). How about a planned sabbatical in 5 years or a cash windfall at age 70? A plan can switch genders several times during a person's lifetime.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by Flaccidsteele »

Thank you for the comments. I had never given the two terms much thought. I was originally thrown off by the term 'phase' (e.g. phase transition in thermodynamics) which implies a hardline, distinct stage that occurs in series.

I am comfortable that accumulation and withdrawal can and does occur in parallel.

I also misinterpreted this phases as being dependent on wealth or some similar metric. Then if wealth continued to grow, technically, accumulation is still occurring.

A strange thing happens with cash produced by the portfolio (e.g. dividends, rental income, etc.): Assuming an individual spends less than they earn. If an individual starts off working and makes $100k a year they are considered to be in "accumulation" mode. If this same individual eventually builds up dividend income to replace their $100k income and retires from gainful employment, then they would be considered in "withdrawal" mode.

However, if this portfolio is passed on or inherited by their child, would the child stay in withdrawal mode or switch back to accumulation mode? What if the portfolio threw off $1m instead of $100k? What if the child doesn't work? What if the child gets a low paying part-time job?

PS: As someone mentioned above, this isn't rocket science, which is true. However I now have to question what any particular poster means when they talk about their "accumulation" or "withdrawal" phase. I can no longer assume that their definition is similar to my own.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by AltaRed »

Flaccidsteele wrote: However I now have to question what any particular poster means when they talk about their "accumulation" or "withdrawal" phase. I can no longer assume that their definition is similar to my own.
Based on your posts, it seems almost everyone is different from you. Thus if you simply assume more classical definitions when interpreting others (not the other way around), you will not be confused.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by adrian2 »

AltaRed wrote:
Flaccidsteele wrote: However I now have to question what any particular poster means when they talk about their "accumulation" or "withdrawal" phase. I can no longer assume that their definition is similar to my own.
Based on your posts, it seems almost everyone is different from you. Thus if you simply assume more classical definitions when interpreting others (not the other way around), you will not be confused.
Flaccidsteele, please, pretty please, change the wording in your signature line:
I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation).
Echoing AltaRed's comments, you use words in a different way than most people. At least in your signature line, take out the "fragile" piece, please.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by ockham »

Flaccidsteele wrote: I now have to question what any particular poster means when they talk about their "accumulation" or "withdrawal" phase. I can no longer assume that their definition is similar to my own.
Step back from the existential abyss, please. Take a deep breath. You started this thread with a quote from ghariton. Then, upthread, ghariton gave you a plain, straightforward account of what he meant. That's all there's to it. Really.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by Arby »

Flaccidsteele wrote:However I now have to question what any particular poster means when they talk about their "accumulation" or "withdrawal" phase. I can no longer assume that their definition is similar to my own.
My net worth has grown substantially since I retired. The annual distributions thrown off by my portfolio are more than sufficient to fund my annual expenses. I would say I'm in the withdrawal stage, as I agree with the definition from ghariton. However, referring to my situation as acculation or withdrawal stage doesn't make the slighest bit of difference. My net worth and income doesnt change, no matter what you call this phase of my life.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by Dejavu »

2014 was our first year of retirement (about 90% anyway). All I am interested in is, will my net worth change. (It stopped increasing in June!) What,s it doing now? (going down). I must be in withdrawal stage. Nuff said.Dejavu
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Re: Differentiating between Accumulation and Withdrawal phas

Post by AltaRed »

Arby wrote:My net worth has grown substantially since I retired. The annual distributions thrown off by my portfolio are more than sufficient to fund my annual expenses. I would say I'm in the withdrawal stage, as I agree with the definition from ghariton. However, referring to my situation as acculation or withdrawal stage doesn't make the slighest bit of difference. My net worth and income doesnt change, no matter what you call this phase of my life.
The point really is whether one is tapping into the investment portfolio to fund at least part of one's annual living expenses. If one is doing so, it is withdrawal whether net worth of that portfolio is increasing or decreasing.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by Thorn »

I am often confused by descriptions of "withdrawal" scenarios (e.g. 4% a year is OK) that seem to assume the individual needs to consume savings capital to survive.

In a number of posts above this does not appear to be the case. We may have someone who:
(1) Does not require any income or capital from their financial securities to meet ongoing expenses,
(2) Needs some varying degree of income from securities to supplement other income such as pensions, and
(3) Needs all of the income and perhaps some capital to survive each year.

It seems that the particular case might lead to very different approaches to investing and financial planning in general, and various levels of ongoing anxiety about a person's financial situation.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by Bylo Selhi »

Thorn wrote:I am often confused by descriptions of "withdrawal" scenarios (e.g. 4% a year is OK) that seem to assume the individual needs to consume savings capital to survive.
The 4% number is just a starting point. It's not some immutable law of finance. It's a useful tool for estimating how much you need to accumulate (~25x your anticipated annual spending in retirement) and then in retirement how much you can safely spend (~4% of nestegg) without depleting your funds.
It seems that the particular case might lead to very different approaches to investing and financial planning in general, and various levels of ongoing anxiety about a person's financial situation.
Everyone's situation will be different so we have to make individual plans. If you have no other sources of income in retirement and you want to be able to spend, say $60k/yr, then you'll need a portfolio of about 60x25=$1.5M. But if you have other sources of retirement income, e.g. CPP, OAS, private pension, etc. then you need to incorporate them into your planning. Using the same example if you expect to receive $20k/year from CPP and OAS and another $20k/yr from a company pension then you only need to provide for the extra $20k/yr.In this situation you'll need about $500k in additional investments.

There have also been numerous discussions about "fine tuning" the 4% rate. For example if you can reduce your spending in years when market returns are below expected rates and treat yourself when they exceed them, then you can probably go with a higher theoretical withdrawal rate. There have also been numerous discussions about the equivalence of earning x% of portfolio in dividends without touching capital vs. cashing out the same x% from capital in a portfolio that pays no dividends or some combination thereof. Books have been written on this sort of stuff. Nevertheless you're unlikely to find an authoritative answer, let alone some magical failproof withdrawal rate, in the literature. You have to work this out for yourself based on your personal situation. You also have to accept that despite your best efforts your plan may not succeed.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by Flaccidsteele »

AltaRed wrote:The point really is whether one is tapping into the investment portfolio to fund at least part of one's annual living expenses. If one is doing so, it is withdrawal whether net worth of that portfolio is increasing or decreasing.
Would this imply that somebody like Bill Gates, who is primarily involved in philanthropy, is in the withdrawal phase?

And also on an infinitesimally smaller scale, if my child grew up and was living on rental income from my inheritance, would they also be in withdrawal phase (perhaps without ever going through the accumulation phase)?
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Re: Differentiating between Accumulation and Withdrawal phas

Post by AltaRed »

Neither of those two situations 'fit' any kind of bell curve, i.e. they are extreme outliers well within the highest and lowest deciles of what 'normal' people talk about. Certainly not the type of people who would be seeking mainstream financial planning guidance nor reading this forum.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by Flaccidsteele »

AltaRed wrote:Neither of those two situations 'fit' any kind of bell curve, i.e. they are extreme outliers well within the highest and lowest deciles of what 'normal' people talk about. Certainly not the type of people who would be seeking mainstream financial planning guidance nor reading this forum.
Thanks for this.

How could we determine the cut-off where accumulation/withdrawal phase terminology apply?
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Re: Differentiating between Accumulation and Withdrawal phas

Post by adrian2 »

Flaccidsteele wrote:accumulation/withdrawal phase terminology
Once again, since you are preoccupied about word usage, please, pretty please, change the wording in your signature line:
I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation).
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Re: Differentiating between Accumulation and Withdrawal phas

Post by AltaRed »

Flaccidsteele wrote:How could we determine the cut-off where accumulation/withdrawal phase terminology apply?
You don't because it likely has slightly different meanings for each individual. That said, as stated upthread, withdrawal is generally when cash outflows from investable assets (real and/or capital) on an annual (or perhaps 5 year rolling forward basis) exceed cash inflows....regardless of whether the investable assets grow in size or not. How more simple can it get?

FWIW, I have clearly been in withdrawal mode for over 8 years even though my portfolio has grown in value.
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Re: Differentiating between Accumulation and Withdrawal phas

Post by steves »

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