Many American retirees, driven by an understandable fear of outliving their savings, are inadvertently underspending their wealth, potentially sacrificing a more comfortable and meaningful retirement. New research from Morningstar’s Behavioral Insights Group reveals that a significant portion of retirees adopt overly simplified and conservative spending strategies, leading to portfolios that often grow rather than diminish, even over decades.
The “Boogeyman” of Retirement
The childhood fear of the boogeyman, a lurking threat in the dark, finds its adult parallel in the pervasive anxiety of running out of money during retirement. This concern is particularly acute for a generation now solely responsible for both accumulating their retirement savings and determining their annual income. The complexity of this financial puzzle, coupled with the dire consequences of miscalculation, often leads individuals to default to caution, even when it’s counterproductive.
Morningstar’s Findings on Underspending
Morningstar’s recent research highlights the prevalence of this conservative approach, finding that ‘half of retirees opt for highly simplified approaches for determining their retirement spending.’ These methods include merely calculating current expenses, solely spending dividends, or anchoring on required minimum distributions (RMDs). While seemingly prudent, these ‘set-it-and-forget-it’ strategies fail to account for crucial factors such as total wealth, evolving life goals, or economic realities like inflation, resulting in inflexible and overly conservative spending patterns.
Contrary to widespread fears, the data indicates that ‘retirees who have at least the median amount of assets tend to underspend relative to how much they could spend safely.’ This trend is so pronounced that ‘across retirement, many retirees see their wealth increase instead of decrease.’ These findings hold true even for those planning to leave a bequest or anticipating a long post-retirement period. Christine Benz, Morningstar’s director of personal finance and retirement planning, underscores this point, stating, ‘Even the retirees who spend in line with our ‘base case,’ which in 2025 meant taking 3.9% initially and inflation-adjusting withdrawals each year thereafter, will tend to have significant remaining balances after 30 years of withdrawals.’ The implication is clear: the risk for these retirees is not destitution, but rather ‘not fully enjoying the fruits of their labor.’
Indicators of Overly Cautious Spending
For retirees wondering if they fall into this category, Morningstar’s research identifies several key indicators of underspending relative to capacity:
- Relying on simple, hands-off strategies such as withdrawing only dividends and interest, basing calculations on current lifestyle, or pulling just your RMDs.
- Finding your retirement savings portfolio barely declines or even grows year after year.
- Deferring essential or discretionary expenses that are reasonably affordable.
This behavior, while understandable, stems from a natural inclination to mitigate the worst-case scenario. However, it often comes at the expense of a richer, more fulfilling retirement experience.
Shifting Focus: Goals as Motivation
To counteract this ingrained caution, Morningstar suggests a fundamental shift in perspective: leveraging personal goals as a powerful motivator for spending. Just as aspirational goals drive individuals to save diligently during their working years, clearly defined objectives in retirement can provide the impetus to strategically deploy accumulated wealth. ‘Our research suggests that to engage with more complex ways of determining their retirement income, many retirees may need the motivation of personal goals. When you’re working, goals help motivate you to save. In retirement, your goals can help motivate you to spend,’ notes the research.
Crafting a Goal-Driven Strategy
Defining these retirement goals begins with an examination of personal values. A framework like the PERMA-V model can assist retirees in articulating what truly matters to them. For instance, if a retiree values spending time in nature, finding joy and engagement through hiking, they might set a concrete financial goal: visiting the top 10 national parks over the next decade. This transforms abstract wealth into a tangible plan for a desired lifestyle, providing a compelling reason to engage with spending strategies beyond mere preservation.
Implementing a Personalized Plan
Armed with this renewed motivation, retirees should then critically assess their current spending strategies. Do these simplified methods align with their newly articulated goals? If not, exploring more sophisticated guidelines, such as a safe withdrawal rate, becomes a logical next step. While engaging with more complex strategies independently can feel intimidating, consulting a financial adviser offers a valuable pathway to determine how best to draw on retirement savings while simultaneously achieving personal aspirations. Danielle Labotka, Ph.D., a behavioral scientist for Morningstar, emphasizes the importance of this proactive approach.
The journey to a truly fulfilling retirement involves more than just accumulating wealth; it requires a thoughtful and intentional approach to spending it. Overcoming the inherent fear of depletion by embracing a goal-oriented, personalized financial plan can unlock the potential for a retirement that is not only secure but also rich in experiences and aligned with deeply held values, ensuring that the ‘fruits of labor’ are indeed fully enjoyed.
