Many retirees who saved for decades are spending far less than they can afford, denying themselves the retirement they worked toward.
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Retirees Underspend as Simple Withdrawal Rules Ignore 300% Market Gain
Many retirees who saved for decades are spending far less than they can afford, denying themselves the retirement they worked toward.
About half of U.S. retirees rely on simple hands-off withdrawal rules that ignore inflation, longevity and portfolio performance, leading the top 50% of savers to underspend relative to what they could afford, new Morningstar research finds.
"Retirees have a lot of factors that can impact how much money they can pull from their retirement accounts," said Danielle Labotka, behavioral scientist at Morningstar. "It's not just known factors like how much money I have in my account, but unknown factors too, like how long will you live, what is inflation going to look like, how's your portfolio going to perform."
The research found that retirees who rely on set-and-forget strategies — withdrawing only dividends, basing spending on current expenses, or sticking to required minimum distributions — tend to underspend because these rules are not tailored to the individual, their portfolio or the economic environment. Since 2016, the price of a loaf of bread has risen about 39 percent, while the stock market has grown over 300 percent, meaning most portfolios have outperformed inflation.
The stakes are meaningful for retirement quality of life. Many retirees see their wealth grow over retirement rather than decline, suggesting the fear of running out of money is doing more harm than good. Researchers recommend retirees periodically review their withdrawal strategies and set vivid personal goals to motivate spending.
The underspending problem is not about retirees hoarding money for bequests or end-of-life medical care, Labotka said. Rather, it reflects a decision-making gap: retirees are underspending money they want to spend on themselves.
Fear and complexity drive the behavior. Even retirees who know they can afford to spend more still use conservative withdrawal approaches because the decision is complex — accounting for multiple unknown and shifting factors to fund a roughly 30-year retirement — and the consequences of falling short are severe.
Advisors don't necessarily solve the problem. Morningstar found that retirees who work with financial advisors behave similarly to the rest of the group, often handing off the calculation without a strong grasp of how their retirement income is derived. Many advisors report their clients have an underspending problem too.
Even more sophisticated strategies leave money on the table. Christine Benz has noted that even using a safe withdrawal rate adjusted for inflation, retirees are likely to have a significant balance after 30 years.
Three Signs You're Underspending
Labotka outlined three ways retirees can determine whether they're underspending. First, if you're in the top 50% of savers and rely on simple hands-off approaches like withdrawing dividends, basing spending on current lifestyle, or pulling required minimum distributions, that could be you. Second, look at your portfolio and overall wealth — if it's barely declining or growing year after year, you might be underspending. Third, examine behavior: deferring essential or discretionary expenses you can reasonably afford is a sign.
Finding Permission to Spend
To shift mindset, retirees need a motivation to spend. In working years, retirement itself motivates saving; once retired, that saving habit must be broken. Labotka recommends articulating values that matter most for a good retirement, using frameworks like PERMA-V as a starting point. Goals built on values provide motivation and flexibility — if circumstances change, the value remains the anchor.
Review goals once a year, tied to a natural reflection point like New Year's, a birthday or an anniversary.
The takeaway is twofold: periodically review wealth, spending and withdrawal strategies, and find a goal that gives permission to spend. Retirees don't need to spend every last dime, but they should spend more because they deserve a fulfilling retirement funded by their wealth. Figures cited reflect Morningstar's research as published; readers should verify current data against the latest official announcements.
This article is for informational purposes only and does not constitute investment advice.
