Solving the “Retirement Consumption Puzzle”
There’s a forthcoming study(i) that takes an in-depth look at retirees’ (primarily baby boomers) spending habits. The findings reveal a reality that may ring true to many readers:
The data from the study shows that married couples age 65 and older are withdrawing an average of 2.1% annually from their retirement savings. While there is no magic number when it comes to prudent withdrawal rates, 2.1% is materially lower than the standard ‘4% rule’ that has helped retirees avoid running out of money in nearly every 30-year period since 1926(ii).
For example, a retired couple with $4,000,000 in savings could withdraw $160,000/year using the 4% rule, and using historical return assumptions, the risk of running out of money would be relatively low for this couple.
The study also found that for higher-net-worth retirees, the gap between what they could spend and what they do spend is even more pronounced. Some could afford to spend hundreds of thousands more over the course of their retirement, while still preserving wealth for future generations.
Many still choose not to.
Before I dig into the reasons why this under-spending is happening, it’s important to clarify that there are of course many households that exist on the other end of the spectrum, i.e., those that under-save and over-spend. In short, the study’s findings don’t apply across-the-board.
But the research does seem to confirm a theme we encounter often with the retiree demographic, even with those who are financially secure. They’re not spending as much as they can, and there’s anxiety around money even for those who are financially secure
In terms of what is holding people back, the answer lies less in math and more in mindset. Kari talks about this often around the office—money is a feeling and an emotion, not just numbers on a ledger.
Money is very personal for people, and these feelings can be deeply rooted based on experience, how your parents and family viewed money and wealth, and stories from life that shaped your financial values. Money is complicated, which is why as financial advisors it is just as important to listen as it is to plan, analyze, and calculate.
What I’ve described above is not just an RSMA philosophy on retirement spending and planning. It’s also a broad subject matter studied by behavioral economists, and it has a name: “the retirement consumption puzzle.” The question economists are addressing is, why is there a disconnect between financial capacity and actual spending?
One of the most renowned behavioral economists today is Meir Statman, a finance professor at Santa Clara University in California. As he frames it, “many people have the time and money and wisdom to enjoy their lives in a way they never could before(iii)” but they’re not doing it. Why?
Where Spending Friction Comes From, and How to Address It
After decades of saving and delaying gratification, many retirees find it emotionally difficult to flip the switch and start drawing down their assets. Some feel guilt when they spend. Others associate saving with identity—virtue, discipline, and control—while spending triggers anxiety or a fear of scarcity. The loss of a regular paycheck can exacerbate these feelings, and for many, seeing account balances decline can feel like reliving a market crash. It’s no wonder that some end up underspending, even if it compromises quality of life.
On top of that, retirees are also confronting today’s broader economic and geopolitical backdrop. Tariff uncertainty, political instability, and ongoing wars in the Middle East and Ukraine are enough to make even confident investors feel uneasy. When the future feels unpredictable, it’s natural to want to tighten the purse strings.
This sentiment is totally understandable.
The goal of planning is not to see how much you can spend and get right up to that number. It is to align your financial life with your values and to ensure that money continues to be a tool and not a source of stress.
At RSMA, we use financial tools and software to map our clients’ financial lives. This process often involves modeling different scenarios, testing various withdrawal strategies, and also testing to see how the plan holds up under different market return assumptions. We can help clients visualize these outcomes over long time horizons, which can also help break down mental barriers. We also advocate for taking a nimble and flexible approach to spending, such as dialing up or dialing down based on the previous years’ spending, market conditions, or larger upcoming expenses like a remodel or a major trip.
A final point to make about the research study was another finding that makes sense: retirees who spend more, particularly on experiences and values-aligned priorities, tend to be more satisfied in retirement. For some, that might mean travel. For others, it's gifting to children or charities, or simply saying “yes” to opportunities that bring joy and meaning. Again, the goal is not necessarily to spend more—it’s to have confidence that your plan is built for flexibility, which can make it easier to give yourself permission to spend confidently and with intention.
(i) Conducted by PGIM DC Solutions, a Prudential Financial affiliate. Authored by David Blanchett, Head of Retirement.
(ii) Source: “Even Rich Retirees Fear Outliving Their Money,” The Wall Street Journal, December 29, 2024.
(iii) Source: “Even Rich Retirees Fear Outliving Their Money,” The Wall Street Journal, December 29, 2024.
____________
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All indices are unmanaged and may not be invested into directly. Past performance is no guarantee of future results.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Forward P/E ratio (forward price-to-earnings ratio): A valuation metric that compares a stock's current share price to its forecasted earnings per share for the next 12 months or fiscal year.
The MSCI All Country World Index ex US (ACWI ex US) measures the performance of large and mid-cap companies across 22 developed markets and 24 emerging markets, excluding the United States. It covers approximately 85% of the global equity opportunity set outside the US.
All illustrations are hypothetical examples and are not representative of any specific situation. Your results will vary.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The S&P 500 is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance.
The Russell 1000® Value Index measures the performance of the large cap value segment of the US equity universe.
The Russell 1000® Growth Index measures the performance of the large cap growth segment of the US equity universe.
The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. The index covers approximately 85% of the free float-adjusted market capitalization in Japan.
The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the US market. With 576 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.
The MSCI AC Asia ex-Japan Index captures large and mid-cap representation across 2 of 3 Developed Markets (DM) countries* (excluding Japan) and 8 Emerging Markets (EM) countries* in Asia. With 1,020 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe*. With 399 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.