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Will You Need Permission to Spend in Retirement?

5 strategies to help underspenders get over the hump of tapping their investments.

An illustrative image of Christine Benz, director of personal finance and retirement planning of Morningstar.

My husband and I sold some appreciated stock in 2022, resulting in a much bigger-than-usual bill on tax day this year and several tight months for our household budget after that.

Why the tight budget? While we had moved the proceeds from the stock sale to the money market fund in our taxable brokerage account, and therefore the funds to pay the associated taxes were there for the taking, psychology had kicked in. Specifically, I viewed the funds in our brokerage account—and any of our accounts, for that matter—as verboten for spending. Funds flow in a single direction, and that’s into our savings. Taking money out feels terrible. I hate it.

We’re not retired, but this and other experiences illustrate to me that, for our household, the biggest challenge in retirement may be giving ourselves permission to spend what we’ve saved. I understand, intellectually, that the goal of saving and investing is to use the money at some later date. But portfolio spending, in contrast to spending from salary income, feels alien and uncomfortable, as Michelle Singletary wrote in this wonderful article.

I’ve been noodling on this specific problem spot in retirement planning lately. Although gauges of retirement preparedness vary, data suggest that most people haven’t saved nearly enough for their retirements. It’s only natural for people in that situation to take great care to ensure that they don’t prematurely exhaust their savings. But I suspect that many readers face a different sort of problem. Their savings can comfortably replace their working incomes with little risk of running out over their lifetimes, but they spend less than they could spend, often much less. Indeed, researchers have identified a “retirement consumption gap” that’s particularly prevalent among retirees with higher levels of wealth.

Of course, it’s possible that some of that underspending isn’t problematic, especially if retirees are satisfied with their standard of living and/or aim to leave substantial assets for children and grandchildren. But for retirees without a strong bequest motive who might like to make lifetime gifts or spend more in order to maximize their enjoyment and quality of life, dying with a big pot of money isn’t a great outcome.

Here are some ideas for giving yourself permission to spend; the specific strategy you choose will depend in part on your specific hang-up—er, psychology—with respect to spending your money.

Consider an Annuity

This is the “jackboot tactic” on my list; it might be too extreme for some. And it’s also true that many annuities are terrible: high-cost and opaque. But plain-vanilla single-premium immediate annuities have a lot going for them for natural underspenders. Research from David Blanchett and Michael Finke suggests that retirees who hold a higher percentage of their wealth in guaranteed income spend more than retirees whose wealth consists of nonannuitized assets.

Annuities can work for underspenders because they pay out a fixed amount on a regular basis. While the initial outlay may be painful and indeed could prove tough for underspenders to get over, that income stream reduces the extent to which the retiree must turn to her portfolio for income. Moreover, those payouts will last as long as the retiree does; that last feature can help allay concerns about outliving one’s assets. And annuities’ irrevocability—while a bane from certain perspectives—is also attractive in this context. It’s also worth pointing out that a retiree doesn’t have to spend cash flows from an annuity: One retiree I know uses his annuity income for lifetime gifting to his loved ones.

Tilt Your Portfolio Toward Current Income Production

I’m not a big fan of building a retirement portfolio exclusively for current income. When yields were lower, especially, I noted that many retirees were building some very risky-looking portfolios all in the name of income. At the same time, having a portfolio kick off at least a component of your income needs can help with the “permission to spend” problem, much like an annuity (but without the contract and longevity risk pooling). For whatever reason, it might feel psychologically better to spend income versus selling appreciated securities. Moreover, retirees can lock in substantially higher yields on high-quality bond and cash instruments today than they could have even a few years ago. John Rekenthaler and financial planner Allan Roth have written about building laddered portfolios of Treasury Inflation-Protected Securities with an eye toward generating cash flow needs. Retirees might also tilt more heavily toward dividend-payers in their equity portfolios.

Tie Portfolio Withdrawals to Portfolio Performance

Here’s another behavioral trick that could help some retirees get over the hump of spending an appropriate amount: tethering withdrawals to portfolio performance. Under such a system, withdrawals are more modest when the portfolio has lost value and the saving-oriented retiree might be most worried about pulling from her portfolio. When the portfolio performs well, she gives herself permission to spend relatively more; trimming appreciated winners provides cash flows and also has the salutary effect of restoring her portfolio back to her target asset allocation. This approach could go hand in hand with an annuity: If more or all of the retiree’s fixed expenses are coming in through the annuity income, it would likely be easier to make market-based adjustments with the portion of cash flows coming from portfolio withdrawals.

Plan for Spending to Trend Down

For people who find comfort in data, David Blanchett’s research on the trajectory of spending in retirement may help new retirees, especially, get over the hump of spending an appropriate amount from their portfolios. Blanchett’s research shows that most retirees spend more in the early years of retirement, but inflation-adjusted spending trends steadily downward until their early 80s; at that point, healthcare expenses drive an uptick in spending for retirees in aggregate. In other words, it’s probably OK to spend a bit more from your portfolio early on than the oft-cited 4% guideline—because you may well spend less later, more than compensating for those higher earlier withdrawals.

Ask an Advisor To Dole It Out

“Look, I’m just going to start sending you a direct deposit each month so that you can see that this is going to be OK, that your portfolio is not going to suddenly start rapidly dwindling away.” That was financial advisor Dana Anspach’s tack for handling clients who are having trouble spending in line with what they could spend. Noting that she encounters this problem frequently, Anspach said that she has to sometimes resort to tough love, sending clients funds that they can use to splurge on themselves or gift to loved ones (or, I suppose, save). The key takeaway here is to get a second opinion from a qualified advisor on your anticipated spending plan. It may be that your feeling of spending caution is warranted, or the advisor might give you peace of mind to spend more than you are. (As a side note, having a financial advisor urge you to spend more is probably a positive sign that you’ve found an ethical advisor, because advisors have a financial incentive to hang on to fee-generating assets.) If you truly don’t need the funds, the advisor is apt to have some ideas about how gifting strategies—to family and charity—can help reduce your tax bills.

How to Not Outlive Your Money

When it comes to finding a safe withdrawal rate in retirement, flexibility is the key.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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