If Paula Page had all the money in the world, there isn't much she'd do differently. The York, Maine resident, 79, retired from her job as a home furnishings retail manager at age 58 in 2004. Her husband, Lee Page, now 82, continued working, first managing military-space weather monitoring for the Pentagon until 2006 then as a consultant at a cold-weather research facility until 2011.
Between guaranteed income sources, including Social Security and his pensions from the federal government and military service in the National Guard, the couple can afford essentials plus more without dipping into savings or investment accounts. (They do have to take required minimum distributions, aka RMDs.)
A nation of underspenders
It's no surprise they're in an enviable spot after a lifetime of financial prudence. Their daughter, Melinda Page, can attest to a household of careful money management—couponing, camping vacations, bringing popcorn to the movies to save on snacks. Paula's parents and in-laws grew up during the Great Depression and handed down what she calls their "New England ethic of thrift: Use it up, wear it out, make do, or go without."
Melinda has listened in on conversations between her parents and their financial advisor, who has assured them they can spend more and encourages them to do so. But while they can afford to loosen the purse strings, they don't.
The Pages aren't alone. A recent report by the Employee Benefit Research Institute (EBRI) found that more than a third of retirees had 100% or more of assets even after 2 decades of retirement, due to a combination of underspending and market performance.1 While fiscal responsibility is important, the report cautions that underspending has downsides, including unnecessary frugality, being underinsured, and not enjoying a life full of leisure activities you now have time for.
"Sometimes the cheaper option ends up being the more expensive choice when viewed through the broader lens of quality of life," says Randelle Lenoir, vice president and workplace regional leader with Fidelity. "There is real risk of running out of money, yes, but I've seen people overestimate how much time we have to fully enjoy life or to make a meaningful impact."
Why we spend income vs. savings
It's not that retirees aren't spending at all—they are, just from guaranteed income sources that they know will come at regular intervals, like a paycheck from a job they used to have. Studies have found that, as a license to spend, guaranteed income can contribute to retiree happiness. This is one reason Fidelity suggests retirees build enough guaranteed income into their plan to cover essential expenses.
"These are easier [to spend] because they are seen as sources of income, not savings," explains Brianna Middlewood, director, behavioral research scientist at Fidelity. "The check shows up in the mail or the amount drops in the bank account just like a paycheck does. People feel okay spending income—they don't feel okay spending savings. These sources of income are also free from the 'what if' scenarios that come with drawing down money that's still invested: 'What's the market doing right now?'"
And if retirees are more comfortable spending from dividends and interest, that caution may be reflected in conservative income investments that may miss out on potential growth. Focusing too much on certain income-paying investments could also lead to insufficient diversification, or even taking on too much risk in the pursuit of higher yields.
"Beyond the missed growth potential, the greater cost may be the experiences, health benefits, convenience, opportunities, and deeper connections that money could help create today," says Lenoir.
Related: How to safeguard your retirement
Reasons for being scared to spend
While some retirees may have no desire to spend, others may not feel confident in doing so. "The decision to spend savings isn't one decision, it's many: how much, how often, from where, for how long? What are the tax implications of the different options? What if the market changes?" says Middlewood. "These questions are all individually challenging. In combination, they can be completely overwhelming."
Craig Copeland, PhD, director of wealth benefits research at EBRI, agrees that withdrawing from retirement accounts is mired in complexity. "It's easier to just leave it, particularly if retirees have guaranteed income sources," he says. "Sometimes it's easier not to do something if you don't know what to do." He adds that many people aren't good at budgeting how to spend a lump sum across a year.
Other retirees may have FORO—fear of running out of money, or they may have a hard time switching from a saving mindset to a spending one. "The best savers spend decades practicing all the right behaviors to build wealth, e.g., spend less, save more, invest consistently, avoid touching the money," says Lenoir. "What we rarely discuss is the mindset shift it takes to put those resources to work in service of a fulfilling life. Learning how to spend well can be just as important as learning how to save well."
Related: How can I make my retirement savings last?
"Learning how to spend well can be just as important as learning how to save well."
—Randelle Lenoir, vice president and workplace regional leader with Fidelity
Signs you might be an underspender
While possible symptoms of overspending are apparent (e.g., debt, bad credit, conspicuous consumption, hoarding), underspending could manifest in the following ways:
- Not knowing how much you typically spend. "If you don't have a plan or haven't checked your plan in a while, then you don't know whether you're an over- or underspender," Middlewood says. "Research shows that people struggle to accurately report what they spend, but even a rough idea can help: How much did you start the month with and how much did you have at the end?" If the amount you have at the end barely budges each month, take that as a cue to more mindfully plan your spending.
- Finding excuses not to spend. "Affordability often isn't the issue," Lenoir says, "yet the default decision is to choose the cheapest option, postpone meaningful purchases and experiences, or dismiss opportunities with shorthand responses like, 'I don't need it,' 'Maybe later,' or 'I'll leave it to the kids.'" If you constantly seek justifications to hold onto your money, you may be an underspender.
- Saying "no" too often. Doing nothing when you have the resources and capability to do things troubles Copeland, underscoring the theme of denying yourself experiences. "You're not developing social connections and still building assets," he says. "You're not only unnecessarily depriving yourself, but you're also making it likely that you're going to live a less fruitful retirement."
What to do about underspending
Spending more, even if you can afford to, isn't inherently better. The point is to live a more enriching life. Consider the following to address your underspending issue, which could still leave you financially strong and happier, too:
- Work with a pro
A financial professional can help you better understand how much you can safely spend and model the worst-case scenarios you may worry about. Once you see that you can spend more—even if the market were to stumble—you may feel more comfortable spending. "True planning is more than accumulating wealth and growing account balances," Lenoir says. "We don't build nest eggs simply to exist. Our money gains meaning through how it is used."
- Consider annuities
Many people are not fortunate enough to retire with a traditional pension. Annuities can be the most straightforward way to create that pension-like steady stream of income—functioning like a permanent paycheck that can last the rest of your life. An annuity is a contract between you and an insurance company that shifts a portion of market and/or longevity risk away from you and onto the company. There are 2 basic categories of annuities: Income annuities can offer an income stream for life or a set period of time in return for a lump-sum investment, while tax-deferred annuities can allow you to accumulate tax-deferred savings while providing the option to create lifetime income in the future.
Related: How annuities can help retirees feel better about spending
- Replicate a paycheck in retirement
Once you've clocked out for the last time, that weekly or biweekly paycheck stops coming. To recreate that reliable income stream without an annuity, tally up your assets and aim to withdraw 4%‒5% annually. This guideline is an estimate that should be adjusted for inflation. You may wish to set up a consultation with a financial pro to understand your options.
Note: When you reach age 73, you'll have to start taking RMDs from tax-deferred retirement accounts, which should figure into your retirement paycheck pool of assets.
- Frame retirement savings as retirement income
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Sometimes, a simple mindset shift can do the trick. "Savings are sacred in a way," Middlewood says. "If I could wave a magic wand, I might label retirement savings accounts as retirement income accounts just as a means of getting the language we use around these assets to change, and in turn, potentially change how we think about them."
Related: Retirement income calculator
Enjoy your money
Plenty of retirees may spend well below their means yet still lead rich and wholly fulfilling lives. "If someone is deeply content and already living their values to the fullest, there may be nothing to fix," says Lenoir. "What I would challenge people to examine is whether there's fear behind that, and that can be an uncomfortable question. Admitting that you want more from life, more experiences, or a greater impact can feel vulnerable. I've met so many people who could live a richer, more meaningful life if they gave themselves permission to do so."
Paula makes clear that they have never felt deprived and count themselves lucky. They were able to pay for their 2 daughters' educations, never had to borrow to buy a car, and haven't had a mortgage in about 20 years. Recently, when visiting an out-of-town daughter, they even stayed at a hotel that cost $600 per night instead of the $300 per night one they also considered.
And she did think of something she'd like to do, but that in the past had always seemed too extravagant: Go on an all-expenses-paid family trip, first class all the way.