Master the Art of Spending in Retirement

Even in the best of times, it can be challenging to switch gears from saving money to spending it in retirement and making the most of the wealth you've taken a lifetime to build. And these, a growing number of retirees agree, are not the best of times.

More than one-fourth of retirees, some 27%, now say they aren't confident they have enough money to live comfortably throughout their retirement as concerns about inflation, health care costs and Social Security rise. That's a five-point drop over the past year, according to a recent survey from the Employee Benefit Research Institute (EBRI) and Greenwald Research. Fewer than half of the respondents describe their standard of living in retirement as "very good" or "excellent," and four in 10 worry that their Social Security and Medicare benefits will drop in value at some point in the future.

No wonder, then, that many retirees at all levels of wealth are pulling the reins tighter on spending these days — exacerbating an already well-documented reluctance to tap savings in retirement. One recent study by two research fellows at the Retirement Income Institute found, for example, that 65-year-old retirees are spending, on average, only about 2% of their savings. That's just half the commonly recommended 4% "safe" initial withdrawal rate and much lower than the 5% to 6% rate that many advisers now suggest may be a more reasonable starting point.

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Experts have a name for this resistance to spending among retirees of all ages. They call it "the retirement consumption puzzle" or, more simply, FORO: Fear of Running Out.

"Retirees are really apprehensive about touching their money. The fear of maybe one day becoming a homeless person, or dependent on their children or society, runs deep," says Robert Laura, president and CEO of the Wealth and Wellness Group in Brighton, Mich., and cofounder of the Retirement Coaches Association. "That's true even if, on paper, they clearly have enough — $1 million, $2 million, $3 million or more — and even if they're working with a financial adviser and are financially savvy themselves."

The disquiet over spending is fueled in part because so much about retirement is uncertain, experts say. You don't know how long you're going to live, what your health care needs will be as you age, or how the economy and financial markets will fare. Then too, after a lifetime of being urged to save, save and save some more, it's tough to suddenly flip a switch and spend freely instead.

"When you've been conditioned for decades to measure success by how much your account balances are rising, it's painful and unsettling to see the numbers go down," says certified financial planner Dana Anspach, founder and CEO of Sensible Money in Scottsdale, Ariz., and author of Living Off Your Acorns: Your Guide to the Four Phases of Retirement. "But if you've done the math and you have enough to see you through, you don't want anxiety about running out of money to prevent you from enjoying what you've spent a lifetime saving and building toward."

Here's how experts suggest you can meet the challenges of moving from saving to spending and enjoy your money to the fullest in retirement.

Why spending is so hard

Just how little are retirees spending? In some cases, very little indeed, research shows— so much so that a lot end up with more money in savings many years into retirement than they had when they first left the workforce.

Consider, for instance, another EBRI study released this spring that looked at asset decumulation, a fancy term for how people spend the money they've saved for retirement. It found that six in 10 retirees who had $500,000 or more saved when they quit full-time work still have at least 80% of their assets intact a decade into retirement, and 45% have more money than they started with. Even after 22 years, 42% still had most, all or more than all of their original savings left. And many households with lesser levels of wealth also had a significant portion of their savings left many years into retirement.

True, the stock market's robust returns lately have helped retiree account balances stay steady or grow. But research predating the past few years of double-digit returns shows the same pattern of lower-than-expected spending at various levels of wealth. One 2009 study, for instance, estimated that by the time middle-income retirees hit their eighties, they still had not touched about three-fourths of their savings. Meanwhile, research from 2016 published in the Journal of Financial Planning found that wealthier retirees were the most reluctant spenders — a result replicated often in other studies.

Why are retirees so determined to hang on to their savings and not spend as much as they can afford? Uncertainty about various aspects of retirement, such as your longevity or health, is the most frequently cited explanation. But that tells only part of the story, as evidenced by a working paper published this year by professors at the University of California–Irvine and the State University of New York at Albany that aimed to strip those unknowns from the question of how much to spend in retirement.

In a controlled experiment with people ages 45 to 55 that was designed to mimic the spending decisions retirees face, participants were told they had ample assets to cover their living expenses in retirement, health problems were taken off the table, they had detailed information about their risk of dying, and they were told Social Security would remain solvent. But just like retirees in real life, the "retirees" in the experiment spent less than they could afford, preferring to live off Social Security, dividends and interest rather than dip into the principal of their savings, and many ended up with more wealth by the end of their "retirement" than the amount they had to start.

Other research confirms that how you get your money in retirement makes a dramatic difference to how much you may be willing to spend. If you tap savings to pay for what you want, chances are you will spend a lot less than if you can rely more on guaranteed sources of lifetime income, such as Social Security, pensions and annuities.

"If you have to physically take action to withdraw from savings every time you need money, that's painful, it hurts," says David Blanchett, head of retirement research at Prudential Financial. "Guaranteed income like Social Security and pensions feels more like a paycheck, the way you received money when you were working. And people are much more comfortable spending that."

How much more? A study that Blanchett coauthored last year with Michael Finke, a professor of economic security at The American College of Financial Services, found that retirees, on average, spend about 80% of the money they receive from lifetime income sources but approximately half the amount they have available to spend from investment accounts and other assets.

Their analysis of data from the Health and Retirement Study, an ongoing nationally representative survey of some 20,000 Americans older than age 50 conducted by the University of Michigan, also found that retirees spend a higher rate of their savings once they have to take required minimum distributions (RMDs) from a 401(k), traditional IRA or other tax-deferred retirement savings account (at age 73 for those born between 1951 and 1959, rising to 75 for those born in 1960 or later).

"When it's mandated that they have to take money from savings, people spend it, possibly because it feels more like income than a voluntary withdrawal does," Blanchett says. But, he notes, those retirees have missed out when "they could have enjoyed spending more in the younger, go-go years of retirement."

Another reason experts believe retirees often don't draw from savings: It's just too complicated to figure out how much to safely take.

New research from Morningstar found that half of retirees with investable assets at or above median level rely on simple, hands-off strategies to guide how much they spend, such as using RMDs or drawing only from dividends and interest. These approaches, the researchers found, require little engagement or complex decision-making but may result in retirees spending less than they can comfortably or optimally afford.

"This may happen as a result of our natural aversion to losses, which loom larger in retirement when you are living on a fixed income," says Samantha Lamas, a senior behavioral researcher at Morningstar and a coauthor of the study. "The endowment effect, where you value something more highly because you own it, may also be a factor. Once you retire, you're pulling money out of your own pocket for spending. It's not coming from your employer, and it feels so much more real and painful."

Experts worry that the problem of underspending may get worse as fewer retirees have access to pensions and the RMD age rises — or if stock prices tank.

"The markets have been able to shrug off bad news and deliver consistently good returns. But at some point, that will end for a while and, given the unusual number of years returns have been good, it could be a prolonged slump," Blanchett says. "That creates added urgency to set up a thoughtful spending strategy now."

How to loosen the purse strings

"I don't need to spend more; I'm comfortable as I am." That's the standard response planner Dana Anspach says she gets from some of her retired clients when she tells them they can easily afford to spend more than they currently are.

"If you've built a good level of assets because you were frugal and had disciplined savings habits, you don't like to see that number go down because of what may seem like unnecessary or even frivolous spending," she says. "But people often mistakenly think they have plenty of time to have the experiences they'll savor as memories when they're older, given that retirement may last 20 or 30 years or more. In reality, though, you may only have a dozen years or so when your health and energy allow you to travel and pursue other activities that could make your retirement more enjoyable."

Mark Stancato, a CFP and founder of VIP Wealth Advisors in Decatur, Ga., recalls a couple who retired in their early sixties and were initially reluctant to spend beyond their regular expenses despite his assurances that they could easily afford to do more. By their late sixties, they were eager to travel. But by then, one spouse had developed back problems, and the other had heart issues. Their mobility was limited, they couldn't stray far from their doctors, and the trips were no longer viable.

"So many people do an amazing job in the accumulation phase of retirement planning, but no one teaches them the decumulation phase," he says. "It's hard to go from a scarcity mind-set to an abundance mind-set after 40 years of working and saving."

Retirement coach Laura puts it this way: "People worry too much about running out of money and maybe not enough about running out of time."

To make sure neither outcome happens to you, here's what experts recommend.

1. Run the numbers

Getting yourself to spend what you can comfortably afford in retirement is typically less of a math problem and more of a mind-set challenge, experts say. But numbers are the starting point. If you don't know how much money you'll have in retirement from all sources, the income those assets will generate, what your fixed expenses are and what bumps in the road might cost you, it's tough to get past the fear of running out of money — or make adjustments if your concerns have some justification.

Yet many people aren't clear on this front. Research by J.P. Morgan Asset Management shows that 56% of workers don't know their savings target for retirement. And few people have a strategy for drawing down their assets once they get there, a Texas Tech University study found. Among those who do, less than one-third think it's a good plan.

The bottom line: If you're winging it when it comes to figuring out how much you need or are nervous about your plan, you're likely to err on the side of caution in terms of spending.

"Even if you have a very meaningful amount of wealth, you still need a plan to spend it down," says Michael Conrath, chief retirement strategist at J.P. Morgan Asset Management. "Otherwise, when you see that account value go down, the emotions kick in, and you start to pull back on the reins."

You can work with an adviser to devise a plan (find candidates via a directory such as napfa.org, letsmakeaplan.org or garrettplanningnetwork.com). Or you can do it yourself using planning software, such as Boldin (free for basic; $12 a month for advanced features), MaxiFi ($109 a year for a standard plan; $149 for premier) or WealthTrace ($229 a year, standard; $289, deluxe).

Whichever route you choose, experts say the plan should be dynamic, stress-testing various scenarios and accounting for how spending may change from year to year and through the various phases of retirement, from most to least active, as your health and energy level dictate.

Says Stancato, "The point of the exercise is to provide clarity that you will be okay."

2. Duplicate a paycheck

What would make you feel more comfortable spending money on pleasurable activities in retirement — say, to take a vacation or go out to dinner with friends: receiving an extra $10,000 a year, guaranteed, for life or getting a one-time lump sum of $140,000?

That's the question Blanchett and Finke put to more than 2,000 Americans in a 2024 study. If you're like most of the respondents, you probably chose that guaranteed 10 grand a year, even though the amounts are actually equivalent — $140,000 is about how much it costs to buy an annuity that would generate $10,000 in income annually for the rest of your life. But the form the money comes in makes all the difference to your comfort spending it.

Analyzing data from the Health and Retirement study, the two researchers also found that retirees with assets that generate steady, guaranteed income that essentially mimics a paycheck — think Social Security benefits as well as pensions and annuities — spend twice as much as retirees with an equivalent amount in savings. In a study this year, J.P. Morgan similarly found that among retirees with comparable levels of total wealth, those with 60% to 80% of that wealth coming from guaranteed sources of income spent significantly more than people who held most of their money in retirement accounts — 44% more, in the case of households worth $1 million to $3 million.

"Generally speaking, as humans, if we have a paycheck coming in, we're somewhat wired to spend it," Conrath says. "The components of wealth dictate our behavior."

If your Social Security benefits and any pension income you get don't cover your essential expenses, advisers say you might consider buying an annuity to close the gap. If you've kept some of your savings in a former employer's 401(k), look first to see whether the plan offers an annuity option. An estimated 14% now do.

Or you can purchase an annuity on your own. Financial experts suggest favoring plain-vanilla, low-fee immediate annuities from highly rated insurers such as Guardian and New York Life. Comparison shop for the best payouts and terms at sites such as ImmediateAnnuities.com and BlueprintIncome.com.

3. Press the easy button

One drawback to annuitizing income: In a world where retirees crave simple strategies, the setup isn't easy. The buying process can be overwhelming, and taking a large sum from savings for the investment can feel painful.

An easier alternative, perhaps, is to set up regular, automated withdrawals from savings to checking or whatever financial accounts you prefer — say, every two weeks or bimonthly, just as many people received their paycheck by direct deposit during their working years. In effect, the system is like a reverse 401(k). You can determine the amount and intervals that make sense, with the help of a financial adviser or a planning tool, and revisit and adjust periodically as needed.

"Essentially, you're applying the same process — automation — that we've learned works successfully to build savings in the accumulation phase of retirement planning to the decumulation phase," says Blanchett. "And because it feels like a paycheck, you're in effect giving yourself a license to spend that money."

4. Leverage mental accounting

Stancato takes the process a step further with some of his clients and splits withdrawals from retirement savings among a few separate accounts, earmarked for specific types of guilt-free spending. "We might label one 'travel,' another 'family experiences' and another one 'fun,' " he says.

The process takes advantage of a behavioral concept called mental accounting. If you designate a certain pool of money for a particular purpose such as travel, you're more likely to use it for trips and not for, say, grocery shopping or to pay your property taxes. "It helps with the psychological barriers to spending, almost like you're giving people permission to spend on the stuff they'll enjoy," Stancato says.

You can also use this kind of bucketing strategy to help address any specific worries you have about money in retirement that may hold you back from spending, Laura says. Anxious about how you'd pay for long-term care if you need it one day? Laura recommends putting enough money in a separate, dedicated account to cover a year's stay in a nursing home — about $120,000, or as close to that as you can manage — so you know you have that expense covered.

Similarly, he says, setting aside enough money in a separate cash account to cover your essential expenses for 12 to 18 months, when combined with other income — about how long a typical market downturn lasts — gives you the peace of mind that you won't need to pull money from your investments at exactly the wrong time if stock prices plummet.

"Segregating assets or being intentional with allocations reduces anxiety and allows you to spend the rest of your money more freely knowing you've got your personal worst-case scenarios covered," Laura says.

5. Aim for no regrets

Laura has a "reframing regrets" exercise that he uses with clients to help direct their discretionary spending to what matters most to them. He asks: What do you want to avoid regretting over the next one, three, five and 10 years?

Inevitably, he says, the answers center around health and family, and on experiences, not possessions. "They'll say, I'd regret not exercising more or taking better care of myself; I'd regret not going on that riverboat cruise with my spouse or taking the grandkids to Disney or renting an Airbnb in Florida or Arizona and flying the whole family in to be together," Laura says. Then he helps them turn the thought into an intentional goal, including a plan to pay for it.

"The idea is to create a no-regrets retirement," Laura says.

Lamas says that kind of introspection — a personal conversation with yourself or a trusted confidante or adviser about what a life well lived looks like for you — helps align your spending with your values. She suggests putting a date on the calendar, once a year, when you take yourself to a coffee shop for a couple of hours and map out your goals for the 12 months ahead, thinking about what activities best reflect your values and how much income you can contribute to the process.

"Many people view retirement as the end point, but that does everyone a disservice," Lamas says. "A lot of our initial goals for retirement — a bucket-list trip, renovating the house, playing more golf — are one-time, big-ticket items that can be accomplished in the first year or lose their gleam after a while. It's important in retirement to keep on dreaming."

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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