We Need to Talk About Your Retirement ‘Spending’

Retirement experts are noticing a concerning trend among retirees: excessive frugality that leaves substantial wealth unspent at life’s end. This pattern of underspending is creating missed opportunities for both retirees and their potential beneficiaries, according to financial planning specialists.

Many retirees proudly report spending far less than the conventional 3-4% withdrawal rates typically recommended by financial advisors. While prudence is commendable, recent retirement income research indicates this approach often leads to significant unspent balances at life’s end.

For example, retirees who follow a “base case” withdrawal strategy – taking 3.9% initially and making inflation adjustments annually – frequently leave behind substantial sums. A retiree starting with $1 million who withdraws $39,000 in the first year (with subsequent inflation adjustments) would typically have approximately $2 million remaining after 30 years with a balanced portfolio. More aggressive equity-heavy portfolios often produce even larger residual balances.

This tendency toward underspending stems from several factors. Many retirees have developed lifelong habits of frugality that become core to their identities. Others worry about potential long-term care expenses later in life, especially without dedicated insurance coverage or earmarked funds.

While leaving money to heirs isn’t inherently problematic, the timing of these transfers raises questions about their utility. According to consumer finance data, the average person inherits money at age 51, with more than a quarter of inheritances going to individuals over 61. By that point, most beneficiaries have established career paths and financial trajectories.

The median inheritance reported in the 2022 Survey of Consumer Finances was $69,000 – a meaningful sum, but often insufficient to fundamentally alter retirement security for someone in their 50s or 60s. By contrast, smaller gifts earlier in life – helping with a home down payment or student loan debt – can have transformative effects on younger relatives’ financial foundations.

Financial planning expert Mike Piper, author of “More Than Enough,” advocates for considering earlier gifts rather than larger posthumous bequests. This approach allows donors to witness the positive impact of their generosity during their lifetimes.

Christine Benz, director of personal finance and retirement planning for Morningstar, shares a personal perspective: “That early gift from them meant much more to me and my husband than did the inheritance we received from them at the end of their lives, even though the latter was a significantly larger sum.”

Financial experts increasingly recommend flexible withdrawal strategies that adjust spending based on market performance. After strong market years, retirees can increase withdrawals; following market downturns, modest belt-tightening is reasonable. Financial planner Jonathan Guyton notes this approach aligns sound investment principles with psychological comfort.

The transition from saving to spending presents psychological hurdles for many retirees. Decades of disciplined saving create deeply ingrained habits that can be difficult to break. Furthermore, uncertainty around market conditions and lifespan makes determining the “right” withdrawal rate challenging.

However, experts suggest that the fear of running out of money often leads to excessive caution. In reality, most retirees following reasonable withdrawal strategies will maintain substantial portfolios throughout retirement.

For those concerned about leaving meaningful legacies, strategic giving during their lifetimes might provide greater satisfaction and impact than posthumous bequests. This shift in perspective – from underspending as a virtue to balanced lifetime spending as a goal – could enhance both retirees’ quality of life and the financial well-being of their beneficiaries.

As retirement planning continues evolving, the focus is increasingly on helping retirees find this balance – maintaining financial security while using their resources to enhance their own lives and support loved ones when that support can make the greatest difference.