Understanding Retirement Underspending

Your retirement is yours to enjoy. However, it comes with financial considerations too. For a lot of people, this makes retirement stressful. You’ve spent your life saving and watching your accounts grow, but now they’re decreasing instead. Psychologically, this can be difficult. As a result, retirement underspending is an issue for a lot of retirees. 

There are many reasons for this and understanding them is key to resolving the issue.

Habit

For most of your working life, you’ve been focused on saving for the future. You’ve built up your retirement fund over time by cutting your spending where you can and watching your portfolio grow. Now that you’re retired, shifting from saving to spending can be very tough.

It’s hard to see your savings go down when you’re so used to seeing them go up. Even when you’re no longer at a point where you need to save, there’s a good chance your first instinct is to be frugal and set money aside anyway because that’s what you’re used to doing. 

Uncertainty and Fear

Life is uncertain. Many retirees worry that, no matter how much they have saved, something will happen and they’ll need the money. For instance, healthcare costs may increase and they won’t be able to afford the care they need. 

There’s also the fear of outliving your savings. People today are living longer lives than ever, which is great, but this comes with a potential risk. You don’t want to spend the last few years of your life destitute, so you save extra just in case.

In addition, there are market uncertainties. Volatility in your portfolio could keep you from spending and inflation increases every year, so your purchasing power decreases. A lot of retirees respond to this by spending as little as possible just in case.

Accounting

For a lot of people, the issue is that they simply don’t know how much they can spend. In these cases, there’s a tendency to play it safe. For instance, some retirees may only feel comfortable with spending their gains, not the principal savings. 

There is also a tendency to overreact to negative market corrections and underreact to positive ones. This means that if the market goes down, you tighten your spending. However, when the market goes up, you don’t increase spending. Over time, this results in retirement underspending. 

When Retirement Underspending Becomes a Problem

There are legitimate reasons to watch your spending when you’re retired. Market risks, inflation, increased life expectancy, and healthcare costs are worth consideration and they’re good reasons to stick to a budget.

However, going too far and being very aggressive with your retirement underspending can cause problems. You end up not using money that you could easily afford to use, and, over time, consistent feelings of uncertainty or fear can cause anxiety. 

As a result, you don’t enjoy your retirement. You don’t go to social events or buy gifts for your grandchildren or travel. You feel guilty every time you spend money. You stress out about relatively small purchases. This isn’t good for your mental health or your retirement lifestyle. 

Changing your spending habits requires a psychological shift. 

What You Can Do About It

No one is saying you should spend unlimited money or go without a budget. You don’t need to go from extreme retirement underspending to retirement overspending. However, there are certain mindset shifts you can make that will help you live a more financially stable retirement. 

The first is to change how you view spending. It isn’t always “using money.” Spending your retirement savings is the reward you get for being diligent and disciplined. It can sometimes help to think of using your savings as a return on investment. Think about what you’re getting, rather than what you’re spending. You aren’t using money to go to dinner with friends, you’re receiving an enjoyable night out with people you care about. Think about how much joy or benefit you’re getting from the money, rather than just the cost. 

Planning will also help you avoid retirement underspending. Talk to your doctor to get an estimated life expectancy. Yes, it’s not always perfect, but it’s an estimate. Then think about how much you spend and your financial goals. This will help you determine your annual cost of living. Break this down into monthly spending limits or consider using the category spending model (allocate a certain amount to food, to entertainment, to travel, etc.). Having a clear plan will let you spend without feeling guilt.