Understanding The Shift From Accumulation To Longevity-Focused Spending

Just like we experience different phases of life in terms of our health, career, and family, our financial life has a cycle of its own, complete with different phases. Whether you are at the start of your career and focusing on building your wealth or nearing retirement, it’s important to understand the difference between accumulation and longevity spending so you can make informed financial choices.

Just like we experience different phases of life in terms of our health, career, and family, our financial life has a cycle of its own, complete with different phases. Whether you are at the start of your career and focusing on building your wealth or nearing retirement, it’s important to understand the difference between accumulation and longevity spending so you can make informed financial planning choices.

Accumulation Spending is the first phase of one’s financial life. The Bank of Colorado describes it as the “build and grow phase.” This is the time from the start of your career until retirement, in which you are accumulating money from working and saving, and making investment choices that allow your money to grow.

“The key to accumulating wealth is to start early,” according to The Bank of Colorado. “The earlier you start, the more your money can grow and the better off you’ll be – thanks to the magic of compounding interest.”

Stacy Miller, CFP® and Founder and CEO of BayView Financial Planning, recently spoke to Her Agenda about the importance of understanding compound interest. Stacy warns that when you don’t, it is very easy to get caught up in a cycle of growing debt.

Instead of being victim to compound interest, Stacy recommends finding ways to earn it yourself, such as opening a High Yield Savings Account.

While saving is an essential part of the phase, investing is equally important. “A diversified investment strategy can often help you earn a return on investment that beats inflation,” she says.

Part of being savvy while you’re accumulating your wealth is knowing when it’s appropriate to spend. Stacy is an advocate of investing in yourself or, as she likes to call it, investing in “future you,” through education, promotion, or adding new streams of income. These ventures might require upfront capital, but will ultimately position you to earn more money in the long run: money that can be saved and invested.

Longevity Spending is often referred to as decumulation or distribution: it’s the phase in one’s financial life that comes after retirement, when one is no longer focused on building wealth but withdrawing from assets in a way that covers one’s expenses while making sure the funds will last throughout the rest of one’s life.

According to The Bank of Colorado, “The goal of the distribution phase is to reduce risk. As you plan, think about reallocating part of your portfolio into safer investments. You don’t want to get caught in a sudden market shift that could substantially affect your earnings.”

While longevity in life is usually thought of as a blessing, we run into risks when we don’t plan for it financially. According to The Stanford Center on Longevity, half of pre-retiree women underestimate the life expectancy of the average 65-year-old woman. This can lead to problems such as retiring too early, failing to save enough, and underestimating expenses. When you underestimate life expectancy, you run the risk of running out of money in retirement.

Therefore, one of the most helpful things women can do to prepare for the shift from accumulation to distribution is to be aware of the tendency to underestimate life expectancy. Working with a Certified Financial Planner in both the accumulation and distribution phases of financial life can help you make more informed choices around when the shift from accumulation to distribution makes the most sense for you.