The Retirement Decumulation Paradox: Why Aren't Retirees Spending More?

When you retire, your finances take a dramatic shift. Instead of that regular paycheck, you’ll likely find that you’re living on Social Security and maybe a pension, then supplementing it with whatever retirement savings you’ve built. Many individuals choose to spend as little as possible, making it difficult to enjoy the rest of their life. Learn more about how to spend with the confidence your savings will last.<https://acl.gov/ltc/basic-needs/how-much-care-will-you-need>

Stephanie Faris
Published August 12th, 2021
Table of Contents
Key Takeaways
  • In retirement, you’ll have less income than you had when you were in the workforce.
  • Many retirees are conservative in their spending out of fear they’ll run out of money.
  • The right strategy can ensure you strike the right balance between enjoying retirement and preserving your savings so it will last.

When you retire, your finances take a dramatic shift. Instead of that regular paycheck, you’ll likely find that you’re living on Social Security and maybe a pension, then supplementing it with whatever retirement savings you’ve built.

Known as decumulation, this shift is important. You’ll have limited resources, so you want to make sure your money will last. But many retirees swing too far in the other direction. They leave too much money in their savings, spending conservatively and dying with a large pool of assets they never enjoyed.

Why Aren't Retirees Spending More?

There can be a lot of “unknowns” when it comes to retirement. Even if you’ve set money aside and prepared a budget, there will always be unexpected expenses. In those early years, you’ll also be tweaking your budget as you learn more about your retirement spending habits.

That uncertainty leads many retirees to err on the conservative side when it comes to spending. You might forgo all those travel plans you had, for instance, or maybe you’ll put off replacing your car or buying a new TV. You delay spending until tomorrow, when your finances will seem more stable, but tomorrow never comes.

Underspending in Retirement

Certainly, not every retiree underspends. It’s an issue that especially affects affluent retirees. But even among retirees at all income levels, retirement savings withdrawals tend to be modest.

One strategy, the 4 percent rule, advises retirees to take 4 percent each year from retirement savings to make sure it lasts.

But even though the 4 percent rule assures retirees there will be enough left, the numbers show retirees aren’t taking that much. In fact, some retirees don’t even take out the amount their portfolios earn each year, leading to a surplus of funds they could be enjoying.

Why Building a Decumulation Portfolio is Important

The best thing about having a strategy is that it puts you in control. A decumulation portfolio balances your investments while also keeping in mind you’re decumulating. You’ll have fewer risky investments and more assets like stocks and bonds that pay off gradually, but reliably. If you haven’t taken a fresh look at your portfolio with your new retirement income in mind, it’s important to do so.

Accounting for Unexpected Costs with a Retirement Planner

One reason many retirees are more conservative in their withdrawals is a fear of future health issues. The Administration for Community Living estimates that someone turning 65 today has a 70 percent chance that they’ll need long-term care at some point. However, this doesn’t mean you have a likelihood of going into a care facility. This could include in-home healthcare covered by your medical plan.

Although medical costs can be a large part of retirement, that doesn’t mean you have to avoid spending money now. It’s important to take a look at your medical coverage and make sure you have enough set aside for any out-of-pocket costs. You can then decide how much of your savings you can reasonably live off of.

Final Thoughts

The future is uncertain for everyone, whether you’re just starting a career or entering retirement. The right financial plan will take into account your unique situation and create an approach that keeps you safe without sacrificing quality of life. Retirable can help you build a personalized decumulation portfolio that will ensure you’re prepared for the coming years, and a good certified financial planner can take that to the next level, creating a budget and spending plan that will work for you.

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Author
Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

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