When we were children, it was common to be afraid of the boogeyman
Is your cautious retirement spending doing more harm than good?DANIELLE LABOTKA of MorningstarThe Associated Press
When we were children, it was common to be afraid of the boogeyman. As we age, the boogeyman gets replaced with a new fear: running out of money in retirement.
This concern is understandable given so many Americans are now responsible for not only building their retirement savings but also deciding how much they should pay themselves annually in retirement. It’s a problem many don’t feel adequately prepared to solve, especially when failure means a funding shortfall at the end of life.
Limit your spending, limit your lifestyle
Recent research from Morningstar’s Behavioral Insights Group finds half of retirees opt for highly simplified approaches for determining their retirement spending, such as calculating their current expenses, just spending dividends, or anchoring on required minimum distributions.
A set-it-and-forget-it approach may sound like a prudent solution to a common fear, but these simplified methods don’t account for factors such as your total wealth, life goals, or economic events like inflation. The resulting number tends to be inflexible and overly conservative.
In fact, contrary to our fears, retirees who have at least the median amount of assets tend to underspend relative to how much they could spend safely. Indeed, across retirement, many retirees see their wealth increase instead of decrease. These findings hold true even when accounting for retirees who are planning to leave a bequest or who anticipate a long postretirement period.
This issue persists even among retirees who are using more complex spending strategies like a safe withdrawal rate. “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,” says Christine Benz, Morningstar’s director of personal finance and retirement planning.
What’s at stake for these retirees, then, is not becoming destitute, but rather not fully enjoying the fruits of their labor.
How do you know if you’re spending enough of your retirement savings?
If you’re a retiree, you may be underspending relative to your capacity if you:
1. Rely on simple, hands-off strategies like withdrawing only dividends and interest, basing calculations on your current lifestyle, or pulling just your RMDs.
2. Find your retirement savings portfolio barely declines or even grows year after year.
3. Defer essential or discretionary expenses that are reasonably affordable.
If this describes you, you are not alone. It’s natural to think, “The worst thing that could happen is running out of money, and I know I won’t if I just use this simple spending rule.” However, by creating a more personalized plan to determine your retirement income, you can avoid underspending and possibly generate a more comfortable and meaningful retirement lifestyle for yourself.
Goal-setting can make spending feel approachable
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.
To define your retirement goals, we first recommend examining which values you want to live in line with throughout your retirement. A framework like the PERMA-V model can help you articulate what matters to you. From there, you can build out financial goals that reflect the life you want to live.
For example, you may find that you value spending time in nature because when you hike, you feel happy and engaged in the world around you. Then, you might develop a list of the top 10 national parks you want to see and set a goal of visiting them all in the next 10 years. This new goal provides you with an exciting opportunity to spend your retirement savings in a way that feeds your values.
Armed with your new motivation, you should then begin to think about your retirement spending strategies. Do your current, simple strategies help you reach your new goals? If not, you may consider looking at some other (slightly more complicated) guidelines for retirement spending like a safe withdrawal rate.
If engaging with more complicated strategies on your own is still intimidating, consulting a financial adviser can help you determine how to draw on your retirement savings while meeting your goals.
It can feel daunting to get more involved with determining your retirement spending, but don’t let that fear dictate whether you live the retirement you’ve dreamed of.
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This article was provided to The Associated Press by Morningstar. For more retirement content, go to https://www.morningstar.com/retirement.
Danielle Labotka, Ph.D., is a behavioral scientist for Morningstar.
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