Editor’s note: Marianne Oehser is a columnist with Rethinking65. Read more of her articles here.
Marianne Oehser
People spend decades saving for retirement. But when they retire, many are afraid to spend their hard-earned money and unnecessarily limit their experiences in their next chapter. Sadly, it’s not uncommon for retirees to have plenty of money to enjoy this phase of their lives but be unwilling to have or do things they have always wanted.
Take my partner Susan Latremoille’s mother as an example. “My mother didn’t want to buy a new car or new clothes. She would always say, ‘My car will see me out.’ She wasn’t sure how long she would live and just did not want to spend money on herself.”
Susan was a wealth advisor for 38 years and says that underspending in retirement is a major problem. She describes the mindset shift at retirement as a “psychological about-face” when the paychecks from work or a business stop flowing in.
“The goose that laid the golden egg is gone,” she says. “They get into this fear factor that prevents them from enjoying the wealth they’ve worked so hard to create.” Sometimes it’s reluctance to take a great vacation or buy something they would love to have, driven by the desire to pass on wealth.
Another story Susan tells is about a former client who was a retired senior executive. He always wanted to own a Bentley but could never bring himself to spend the money because he thought his kids would need it. Susan facilitated a family meeting with the client and his son and daughter. He told them that he wanted to leave them money. They said, “Dad, we don’t need your money — buy the Bentley.” That’s the permission he needed to treat himself.
And then, we’ve all heard the story of Ebenezer Scrooge in A Christmas Carol. He’s an elderly miser who lives in willful ignorance of the needs of those around him. Sadly, sometimes that story rings too true. Susan had another client who had plenty of money but was afraid to spend it. In this case, her reluctance to spend money hurt her children. They had legitimate financial needs, but she could not bring herself to spend the money to help.
How Common Is It?
It turns out that reluctance to spend in retirement is very common. David Blanchett and Michael Finke, professors at the American College of Financial Services, studied this phenomenon and found retirees consistently spend approximately 75% of what they could afford to. They also found that after controlling for different levels of wealth, retirees with a larger proportion of guaranteed income spent more each year than retirees with a larger proportion of investments.
It happens among people at all financial levels. When Susan was a wealth advisor, she focused on serving high-net-worth individuals. She often says that underspending is rampant with a lot of wealthy people. So, the size of your nest egg does not explain the behavior.
Why Does This Happen?
The reasons people fall into this trap are as varied as the individuals who struggle with this issue.
It might be the meaning they have always attached to receiving a paycheck. For most of us, a paycheck represents financial security. It says, “I am valued,” and we believe it is predictable. When that paycheck is no longer there, it creates a psychological void.
It might be the fear of the unknown. “What if I run out of money?” It is true that when you give up the security of a steady paycheck, you’re exposed to a host of uncertainties like interest rates, stock market corrections and tax changes. This uncertainty can lead retirees to not spend their savings, perhaps even hoarding assets at the expense of fully supporting the retirement lifestyle they might have enjoyed.
Research conducted by Greenwald Associates for BlackRock published in 2023 gives us another clue to this puzzle. “Retirees retain their accumulation mindset. For many, saving and accumulation habits die hard, and spending is hampered by deep-seated fear that they may experience a critical financial or medical shock or otherwise outlive their money.” So, clients may have to break an old habit by practicing spending on things that they or their loved ones want or need.
What is the Solution?
Advisors have a responsibility to have candid conversations with clients when they see they are not spending what they can afford to. Do they have goals for that unspent money, or are they falling into a mindset trap that you can help them work through?
The researchers who found that retirees consistently spend less than they can afford to offer one solution: “Retirees will spend twice as much each year in retirement if they shift investment assets into guaranteed income wealth.” [https://www.protectedincome.org/wp-content/uploads/2024/06/RP-28_BlanchettFinke_v2.pdf]
Maybe creating a “retirement paycheck” with a guaranteed income or simply helping them reframe their retirement income as a paycheck someone else is paying them will help to shift their mindset about spending. We all are more comfortable spending money out of our paycheck than we are spending from savings.
However, your clients still need to know how much they need that paycheck to be. Unless they have a well-thought-through lifestyle plan, they probably don’t have a solid answer.
A good lifestyle plan has a vision and action plan for eight non-financial areas of your life. It shifts the emphasis from the pot of money clients have accumulated to what they want to spend their money on. The lifestyle plan informs their financial plan and budget. It gives people more psychological permission to enjoy their wealth.
Conclusion
Not spending what one can afford to in retirement is a huge missed opportunity. This is money your clients have spent years working for and protecting. Retirement is the time for them to enjoy the money and free time to create their version of a life well-lived.
Marianne Oehser is the author of “Your Happiness Portfolio® for Retirement: It’s Not About the Money,” and co-founder of Next Chapter Lifestyle Advisors. Marianne and her partner, Susan Latremoille, empower financial advisors to help their clients thrive in their post-career by having a clear lifestyle plan to complement their financial plan. To learn more, contact Marianne at Marianne@NextChapterLifestyleAdvisors.com or visit NextChapterLifestyleAdvisors.com.
