Underspending in Retirement: A Sign of Fulfillment or Fear?

How to turn a ‘What if?’ into a ‘So what?’

Sarah Newcomb 14 June, 2022 | 4:38AM
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Financial planning models often assume that people will save up assets during their working years and enjoy spending what they’ve earned during retirement. For many retirees surveyed, however, that’s not the case.

On the contrary, more than half of the retirees surveyed by the Society of Actuaries in 2020 said they planned to maintain or grow their assets in retirement rather than spend them. Another recent study found that after two decades in retirement, nearly a third of retirees had in fact preserved or grown their assets in retirement, challenging the assumptions that advisors often make about drawdown paths.

On its face, underspending seems like the ultimate first-world problem, but is there a real issue here? It depends.

Underspending could lead to several suboptimal outcomes for both investors and the overall economy. For example, economists note that Americans over age 70 have a collective net worth of US$35 trillion (roughly one fourth of total U.S. wealth). Underspending by a large portion of retirees could potentially create a drag on the overall economy. Planners and advisors may worry that they are advising people to overprepare based on faulty assumptions about retirement spending.

Perhaps the most important consideration is the possibility that millions of people are failing to enjoy the wealth they have worked so hard to create, resulting in a suboptimal quality of life. This emotional optimization problem is what I want to address here.

Motives for Underspending

When asked, people give several reasons for not spending down their assets in retirement:

  • Some want to leave a legacy to the next generation.
  • Some want to keep a large sum protected for unknown expenses or in case they need expensive long-term care at the end of their lives.
  • A majority (64%) say that “saving as much as they can makes them feel happy and fulfilled.” (Lucas, 2021.)

None of these motives are, in my opinion, problematic. I don’t believe these people overprepared. Rather, the satisfaction they get from their money comes in the form of emotional security and the sense of safety that maintaining their wealth provides. For them, utility (or satisfaction) comes from having money, not from spending money.

The purpose of wealth is to support well-being. If people are storing assets for the unexpected, or passing wealth to the next generation, then that money is serving its purpose. Spending it would not.

However, there is a problem when saving is rooted in fear or a scarcity mindset. Fear, stress, and rumination significantly reduce well-being. When these emotions become chronic, they eat away at our physical, mental, and relational health. Saving can create financial well-being, but if these emotions are consistently front-of-mind despite clear objective measures of financial security, then money isn’t the real issue.

Fighting the Fear of ‘What if’ Thinking

Some people, despite having met or exceeded their financial goals, still live with a nagging feeling of financial insecurity. What if the market crashes? What if a world war breaks out? What if inflation soars to triple digits? What if my country devolves into chaos? What if?!

If you are battling the curse of “what if” thinking, here is a hard truth: There is no number that can protect you against catastrophic thinking. In this case, don’t focus on the money, focus instead on the mindset.

One of my professional heroes, Dr. Jim Grubman, has spent his career helping wealthy people have healthy financial mindsets. He advises the “worried wealthy” to practice turning each “what if” into a “so what?”

This means that instead of steeping in the fear of “what if?” you practice carrying those thoughts a step or two further: What if the market crashes? Well, what if it does? Really think about it. What would you do in response? If you’re well-diversified, you wouldn’t lose everything, but you’d probably need to make some adjustments. You’d likely cut back on spending. You’d perhaps rely on family more. You might need to move or look for work.

These realities aren’t as frightening as the looming cloud of vague catastrophe that accompanies “what if” thinking. The goal of turning a “what if” into a “so what” is to face our fears and acknowledge that while hardship may indeed come, you are resilient, and you can survive—even thrive—despite significant setbacks.

With all of this in mind, here are some tips for conquering your fears of the financial unknowable. The goal is to feel secure while also enjoying the freedom and opportunities that your money can provide.

  • Focus on what’s in your control. You have limited (if any) influence over the global economy, market volatility, or tomorrow’s headlines. Worrying about things you can’t control is unproductive and sets you up for unhappiness. What you can and do control are things such as: How well diversified your investments are, how much you contribute toward those investments, how well you are insured against catastrophe, and how much you spend. Many people find comfort in setting aside a portion of their assets in very low-risk investments or fixed-income strategies so that they can be assured that even if the worst should happen in the markets, they will still have a baseline of security.
  • Revisit past successes and rebounds. You have been through difficulty before and made it through. Focusing on the strengths, skills, and support that helped you bounce back in the past can blunt the edges of anxiety about the future. You’ve done it before. You can do it again.
  • Turn to your support system. Social support is a critical part of human well-being. Thinking about the people who care about us and support us—emotionally, not financially—can lower stress and break us out of rumination, which allows for calmer, cooler reasoning to occur. Who would still love you even if you didn’t have money? If you don’t have strong social support, then building your relationships may do more for your financial health than building your net worth.

Many people find that after decades of saving, making the shift to spending can be difficult. There is no problem with enjoying the feelings of security and well-being that wealth affords, and if holding on to assets brings you joy and satisfaction, then underspending really isn’t a problem.

But if you find yourself feeling as if there is no amount that will make you feel safe, and the idea of spending fills you with anxiety, then you might benefit from some of the strategies laid out here.

If the issue is significantly interfering with your quality of life, you may also benefit from consulting a financial therapist. These professionals are trained in financial management and psychology, making them helpful allies on the journey to healthier financial mindsets and communication. You can learn more about financial therapy at the Financial Therapy Association.

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About Author

Sarah Newcomb  Sarah Newcomb, Ph.D., is a behavioral economist for Morningstar.

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