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Is this the Hardest Decision in Retirement?

Darryl Rosen • Mar 16, 2023
The following may not be breaking news.  

It’s hard to know how much money to spend in retirement.

I saw this with my 86 year-old father. He has dementia. Years ago, when he was healthy, he could have spent more money. He didn't. We could have gone on a vacation together. Something. Anything. But he was afraid; so he resisted.

There’s an old adage out there among us retirement planning folk that goes something like this.

As people age - many of them resist the urge to take a fancy vacation or buy a boat or even to live a little better!

Then they pass away and can you guess what their descendants do?

They take a fancy vacation, buy a boat and live maybe a lot better with the money that’s left over.

Knowing how much money to spend in retirement is hard. 

For my father, though he’s still alive, it’s just too late. He’ll leave a few bucks behind and, yes, I guess his family will go on a vacation that he indirectly helped pay for.

It makes me sad.

These days, with the demise of pensions, more people than ever before are retiring with a lump sum of assets. Accordingly, the percentage of their retirement income funded through guaranteed income sources like pensions and Social Security is declining. This dynamic leads to what I consider the worst retirement outcome of all. 

Diminished Quality of Life  

When the enormity of the potentially overwhelming, seemingly make-or-break uncertainty of retirement causes you to spend less money…thereby reducing your happiness, comfort and quality of life. 

Studies show that retirees don’t spend nearly as much as they could from their investments. Deciding how much to spend each year is complicated when both the length of retirement and returns on assets are not known. 

The longevity question presents a tradeoff in which a retiree can either spend generously and risk outliving savings, or spend conservatively while having a less enjoyable retirement. 

A retiree who prefers not to accept the risk of outliving savings will spend less - which is my Dad in a nutshell.

There are a variety of reasons to explain why some retirees under-consume, such as the desire to leave a bequest, uncertain medical expenses (especially late in retirement), uncertain life expectancy, etc. 

However, research finds a consumption gap persists even after controlling for these effects.  

It's understood that many retirees want to leave some money to their children and are concerned about medical expenses. However, these amounts are not large enough to justify preserving such a large percentage of assets. 

Spending far less than is optimal in order to self insure against the small risks associated with medical costs or advanced age is a suboptimal approach, especially when there are other ways to manage these risks.

Is there a solution? I believe so and I'll tackle that in my next post - which you can read here.


New Testimonial! (Hey, if I don't toot my own horn...)


Darryl is a talented financial professional who genuinely cares about - and is committed to enhancing - the welfare of his clients. You could easily count the number of people I've ever trusted with my financial future on one hand . . . and I trust Darryl!


David, living in Kentucky 

[All testimonials are from current clients - who didn't receive any compensation for their comments]

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