Americans are on the cusp of the largest wealth transfer in history. Over the next two decades, Baby Boomers will leave behind $120 trillion to their heirs. The advent of the workplace 401(k), decades of stock market gains, and a generation raised on hard work all contributed to this war chest. But we also see a quieter force at work: underspending in retirement.
Spending guidelines are one of the biggest misconceptions in retirement planning. By the time couples sit down with a financial planner, many echo guidelines that circulated in the industry for decades: spend 80% of your pre-retirement income, live only off Social Security and investment income, or withdraw no more than 4% of your portfolio each year. These shortcuts often rest on a flawed assumption that your spending should be lower in retirement than your working years.
Spending rules of thumb are incomplete at best and misguided at worst. They fail to acknowledge the life cycle of human spending.
Three stages of retirement: Go-Go, Slow-Go, No-Go
In general, we divide a retiree’s lifestyle plans into three distinct stages. There’s the “Go-Go” stage in the first 10 to 20 years of retirement. Here, retirees spend more freely to fund items that once felt unattainable, such as travel, eating out and home improvements. Next are the “Slow-Go” years in your 80s, where the realities of aging often promote a simpler lifestyle. The final stage, called the “No-Go” years, may bring the highest costs of all, as retirees often require in-home help, ongoing medical care, and/or long-term care needs.
The point is that spending rarely follows a linear path. Retirement spending projections often sketch a “U-shape,” where spending needs are high in early retirement, lower in mid-retirement, and spike again during the final stage of life. That pattern, of course, contains significant undulation year-to-year as lifestyle needs ebb and flow.
Retirement planning is often framed around how much money you have, but many retirees are now focused on a different resource: time. Time will always be more finite than any monetary asset. That is why so many retirees want to enjoy their nest egg while they are still spry.
Permission to spend (more)
Last week, a couple came into our office with approximately $3 million in investment assets. They worked hard, saved diligently, and invested smartly for decades. The couple’s frugality continued into early retirement, where they chose weekend travel over trips abroad, groceries over restaurants, and a well-worn sedan over the new car they eyed for years. Ironically, the same discipline that built their wealth was now keeping them from enjoying it.
The couple had valid concerns. They watched the wife’s mother struggle with health issues and large long-term care costs at the end of life. Determined not to burden their children, they passed on buying the family’s lake cabin after her death. The couple worried they could not afford its upkeep costs later in life. Those same worries made them hesitant to help their adult children, who were still finding their footing after college.
Our discussion revealed other, deeper-seated concerns. Both remembered the Great Recession vividly, noting the dread they felt watching their 401(k) balances dive nearly 50% in just 18 months. The investments came back, but their concerns over the market stayed with them. This contributed to a lifestyle rooted in fear of the unknown rather than the abundance they worked so hard to create.
The analysis showed little risk of ever running out of money. We reworked their plan to allow for annual travel, ongoing gifts to children, and a yearly rental at the same lake the wife spent her summers as a kid. We even stress-tested the exact scenarios keeping them up at night: a 50% market drop like 2008, decades of high inflation, or a costly long-term care event. In nearly every scenario, the revised plan still left a meaningful inheritance for their children at the end.
The couple’s sense of relief was palpable, but it was the husband’s parting words that stuck with me: “We were so focused on protecting our future that we forgot we were living in it.”
Plan with intention
This brings some readers to an obvious question: “What if I don’t want to spend more?” Many do not need to increase their spending to feel fulfilled. The key is that you ground this decision in a deliberate framework — not an abstract set of fears.
Some reposition certain investment accounts to leave a larger inheritance for their heirs. Others might support philanthropic causes that give them real meaning. Another group might simply dial back their portfolio risk, trading growth for more predictable results.
Often the scariest things in life are the unknowns. Turn those unknowns into something you understand. Otherwise, your coveted go-go years could pass by in a blink.