I frequently engage in conversations with retirees regarding their spending strategies. Many proudly declare that they are spending significantly less than the commonly cited safe withdrawal rates of 3% to 4% initially. They emphasize their frugality, disciplined saving habits, and belief that they do not require more funds. For these individuals, underspending has become a core part of their identity.
The Consequences of Underspending in Retirement
While such restraint is commendable, it raises important questions about the relationship between underspending and the substantial balances often left at the end of life. Research into retirement income consistently shows that underspending typically results in large residual amounts. Even retirees who adhere to a "base case" withdrawal strategy—such as taking 3.9% initially in 2025 and adjusting for inflation annually—tend to accumulate significant sums after 30 years of withdrawals.
For instance, individuals starting retirement with $1 million, withdrawing $39,000 initially (3.9% of the balance), and inflation-adjusting that amount over three decades, often see median ending balances around $2 million for balanced portfolios. More equity-heavy portfolios can yield even higher figures.
Is Leaving a Large Inheritance Always Beneficial?
Certainly, having a sizable residual balance is not inherently negative. These funds commonly pass to children, grandchildren, charities, or other beneficiaries who can utilize them effectively. Moreover, many retirees justifiably worry about potential long-term care costs later in life. For those without long-term care insurance or dedicated funds, underspending may be a rational choice that provides peace of mind.
However, as financial author Mike Piper highlights in his book "More Than Enough," providing smaller gifts to loved ones earlier in their lives might be a superior strategy compared to leaving assets after death. The average age of inheritance recipients is 51, with over a quarter being over 61 years old. At this stage, inheritances can enhance retirement security for heirs, but by the 50s and 60s, life trajectories are often firmly set.
The median inheritance of $69,000, as reported in the 2022 Survey of Consumer Finances, represents only a minor contribution toward retirement needs. In contrast, a modest gift earlier on—such as assistance with a home down payment or student loan repayment—could have a more profound impact by helping a young person establish financial stability. Personally, I recall how my parents' help with a down payment in 1994 meant far more to me and my husband than the larger inheritance we later received, as it provided crucial support during a formative period.
Psychological Barriers to Spending in Retirement
Transitioning from a saving mindset to a spending one in retirement is psychologically challenging. For dedicated savers, frugality is ingrained in their identity, making it difficult to grant themselves "permission to spend." Additionally, determining the "right" withdrawal rate is not an exact science, as it involves navigating uncertain market conditions and an unpredictable time horizon. It is natural to fear depleting one's funds prematurely.
Embracing Flexible Withdrawal Strategies
Based on my insights into retirement spending, I believe most individuals should adopt flexible withdrawal strategies that adjust with portfolio balances. These approaches enable retirees to withdraw more during their lifetimes rather than leaving large sums behind after death. Typically, such methods involve reducing withdrawals after portfolio losses and increasing them following prosperous market years.
As financial planner and researcher Jonathan Guyton notes, this strategy is rare in that it aligns both with sound investment and financial planning principles and feels psychologically appropriate. It encourages a balanced approach to spending that can enhance quality of life without compromising financial security.
Conclusion: A Call to Reevaluate Retirement Spending
Therefore, we should reconsider the praise often given to underspending in retirement. Leaving a substantial bequest is not necessarily the optimal outcome. If you do not require the money, that is understandable, but look around—someone in your life likely does. Making a difference for them may require less than you imagine, and doing so during your lifetime can be more rewarding than posthumous transfers.
This article was provided to The Associated Press by Morningstar. Christine Benz serves as the director of personal finance and retirement planning for Morningstar and co-hosts The Long View podcast.
