Decumulation: the nastiest, hardest problem in finance?
Nobel laureate William F. Sharpe once called decumulation the nastiest, hardest problem in finance. In this Adviser 3.0 session, Vanguard's Warwick Bloore explained why, and set out three areas that reward a closer look: how clients spend, the role of secure income, and how drawdown is managed. What follows is a summary of the themes discussed. It is illustrative rather than prescriptive, and none of it constitutes advice.
Why decumulation is so difficult
The accumulation stage has a clear objective: build the pot. Decumulation is the opposite, and far messier. Warwick framed it as a problem defined by both uncertainty and risk. On the uncertainty side sit longevity, future expenditure, and the balancing of competing goals such as income, legacy and lifetime giving. On the risk side, once earnings stop a client loses much of their power to course correct, sequence of returns risk bites hardest, and later life can bring vulnerability. Wrapped around all of it is the psychological shift from earning and saving to spending down a finite pot.
It is also a topical problem. The FCA's Retirement Income Advice thematic review (March 2024) flagged shortcomings in the sustainability of portfolio withdrawals, the assessment of risk profile and capacity for loss, and advice suitability, alongside firm controls and process. Those first three are exactly the areas the session set out to explore.
Longevity is a distribution, not a number
Using ONS life expectancy data at age 65, average life expectancy is around 86 for men and 88 for women. There is a one in ten chance of reaching 96 and 98 respectively. Set against a typical UK retirement age of 64 to 65, that implies planning horizons stretching from roughly 21 years to well over 30. Planning to the average alone risks leaving a client short in the very scenario, a long life, where running out of money hurts most.
Three ingredients, one real lever
Portfolio longevity comes down to three inputs: investment returns, inflation, and spending. An adviser can flex asset allocation, but markets do what they do, and inflation is outside anyone's control. Spending is the ingredient where advisers have genuine influence, and where clients tend to need the most help.
On spending levels, the PLSA Retirement Living Standards (June 2025) offer a useful anchor. The Comfortable standard is around £43,900 for a single person and £60,600 for a couple. For many advised clients that is a starting point for the conversation rather than an aspiration. At the wealthier end, Forbes' tongue-in-cheek Cost of Living Extremely Well index has run at about 5.0% a year over 41 years against US CPI of 2.8%, a reminder that wealthier clients often experience a higher personal rate of inflation than the headline figure suggests.
Spending patterns themselves are debated. The often-cited U-shaped curve, higher spending early in retirement, a dip in the middle, and a rise later if care is needed, is only one possibility. Other data shows a gradual decline. Faced with that uncertainty, advisers tend to err on the side of caution, which is one reason clients can end up leaving a larger legacy than they ever intended.
Spending approaches
Two familiar rules sit at either end of the spectrum, and neither is perfect on its own.
Whatever the starting point, the appropriate rate is highly individual. A client with a short horizon and flexible spending can sustain a higher rate, while a cautious investor facing a 40-year horizon can only support a low one. That nuance is part of what the FCA review was getting at: a one-size-fits-all withdrawal rate is hard to justify.
Dynamic spending: the middle ground
Dynamic spending is a hybrid. Spending rises with inflation, but within agreed floors and ceilings that respond to how the portfolio performs. In good years spending can drift up towards the ceiling; in poor years it trims back towards the floor. Where a client can accept modest flexibility, this can extend portfolio longevity while keeping spending reasonably stable. Warwick suggested three things make it work in practice:
In essence, it is a deal with the client: target a more ambitious spend in return for a willingness to pare back when markets demand it. Signposting that up front makes the conversation far easier when the time comes.
The role of annuities
Economists have long puzzled over why annuity take-up is so low, even when rates have been attractive. The explanation is largely behavioural: people underestimate their own longevity, an annuity can feel like a gamble against dying early, products are perceived as inflexible, and the process itself carries friction, from understanding the market to shopping around and switching provider.
A purely mathematical view asks how many years a client must live for cumulative annuity income to overtake leaving the money invested. In the illustrative example shown, that break-even sat at around 23 years. But Warwick's central point was that break-even misses three things that matter:
A rate landscape that has shifted
UK annuity rates track the 15-year gilt yield closely. Three moments stand out: the 2008 financial crisis, after which yields and rates fell sharply; 2015 pension freedoms, which made drawdown relatively more attractive; and the 2022 bond market sell-off, after which yields and rates rose again. Rates are not quite back to their pre-2008 levels, but they are close, and even on a break-even basis alone the case looks more compelling than it has for well over a decade.
The market has responded. UK annuity purchases by value have more than doubled, rising around 106% from roughly £3.6bn in 2022 to £7.4bn in 2025. Thinking has moved on too, with ideas such as building up slices of secure income over time like a glide path, using a deferred annuity from age 75 as genuine longevity insurance, and blending a partial annuity with a portfolio that can then take slightly more risk on the remainder.
The elephant in the room
For an adviser charging on assets under management, annuitising reduces the fund and, all else equal, the revenue it generates. Warwick was candid about that tension, while arguing that under-using annuities is the bigger risk. A thoughtful approach to secure income strengthens the proposition and builds trust precisely because a recommendation that appears to run counter to the adviser's own incentives tends to deepen it. Blended solutions preserve much of the fund, and a partially annuitised portfolio is drawn on at a lower rate, so it depletes more slowly.
The summary: annuities are not for every client, but they should not be overlooked. They are an important part of the retirement toolkit, and advisers are visibly changing their thinking.
Drawdown management and bucketing
Bucketing splits assets into pots to manage sequence risk. A two-bucket version pairs a long-term growth portfolio with a cash reserve: you spend from cash, replenish from growth, and press pause on selling growth assets during a downturn. A three-bucket version adds a medium-term pot, often bonds or a lower-risk multi-asset fund. The session examined it from two angles.
The behavioural case is real
Bucketing taps into mental accounting, the way people naturally think about money in separate pots. As Daniel Kahneman observed, money is fungible even when we treat it otherwise. That framing can strengthen the adviser relationship, encourage clients to accept volatility in the long-term bucket, and support withdrawal discipline. The value of avoiding panic is hard to overstate: in the 2020 sell-off, moving a 60/40 portfolio to cash left an investor materially worse off than one who stayed the course.
The financial case is weaker
The trouble starts when markets move. Steady growth is simple, but a booming or falling market forces judgement calls: take profits into cash, or not? Stop selling growth, and when do you restart? These are market-timing decisions, often made on gut feel, under pressure, and inconsistently across a client bank. Add a third bucket and the permutations multiply.
The most rigorous evidence cited was Javier Estrada's work (IESE Business School, 2019), spanning 115 years of data across 21 countries. It found that bucketing strategies tended to underperform a disciplined static allocation. Bucketing avoids selling low, but it also misses buying low, whereas a rebalanced static portfolio does the opposite, buying into a market fall. Cash itself carries a cost, with a historically negative real return that drags on performance. And when you sketch out what bucketing actually produces over time, lower-risk assets rising with inflation while growth assets deplete, you arrive at something that looks a lot like a glide path, only with discretionary market calls bolted on.
The opportunity in complexity
None of the three areas solves decumulation by itself, and even together they do not fully tame it. A great retirement experience comes from getting the portfolio, the financial planning and the client relationship working in concert. That is precisely why the problem is such an opportunity. Much of the value advisers add, from behavioural coaching to spending strategy, is concentrated in the decumulation phase.
Sharpe called it the nastiest, hardest problem in finance. Handled well, it is also one of the clearest chances an adviser has to demonstrate their worth.
From the Q&A
Pinning down a client's real spend. The PLSA Comfortable figure is a useful anchor, but most clients want more. Online tools, checklists and category-by-category spreadsheets all help, and estimates should be course-corrected over time as plans meet reality.
Personal inflation for wealthier clients. Planning to a rate above headline CPI can be sensible, balanced against false precision. Where spending is broken down by category, a more personalised inflation assumption can be built up and tends to resonate with clients.
Implementing dynamic spending. A cash flow plan is a powerful route. Rerun it each year: if the sustainable figure moves from £50,000 to £48,000, that is dynamic spending in action, and course correction made concrete.
A middle ground on bucketing. Present the mix of stocks, bonds and cash to clients as buckets for clarity, while managing it behind the scenes as one portfolio, rebalancing into falls.
Inheriting a client drawing down too fast. Harsh truths, delivered gently, with evidence. A stochastic cash flow shows a range of outcomes rather than a single line, which makes a difficult conversation more manageable, if never entirely easy.
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