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Feature Behavioral Finance Retired Investor

Are You Spending Too Little in Retirement?

While mental tools and self-control are useful when saving, in retirement, they can stop us from spending on ourselves and family.

by Meir Statman | April 2018

  • Useful mental tools such as distinct accounts and rules regarding saving and spending can turn into obstacles in retirement when it’s time to dip into capital.
  • Concern about running out of money is regularly exaggerated in inflated estimates of life expectancy. Plus, older people spend less.
  • We need not feel guilty about spending our hard-earned savings on ourselves or sharing “over-saved” money with family and the needy.

An elderly couple moving into an assisted-living apartment calls their son in another state for help with moving their belongings. A widow in her 90s finds it difficult to clean her home, yet refuses to hire help.

These people are not wealthy, but neither are they poor. Each has more than enough money to pay a moving company or a cleaning crew, without the risk of running out of money before running out of life. Yet they resist, insisting that they cannot afford these services. Why do people behave this way?

I was intrigued by that question, especially given that I research and teach behavioral finance—a field that combines finance and human behavior. I also wanted to know what we could learn about how people change—or fail to change—their attitudes about saving and spending as they go from work to retirement. So, I set out to try to answer them in my latest book, “Finance for Normal People: How Investors and Markets Behave” (Oxford University Press, May 2017), in recent presentations to financial advisers and in an article I’ve written for The Wall Street Journal (“The Mental Mistakes We Make With Retirement Spending,” April 24, 2017.)

The responses have been fascinating in their own right. I have learned much from the many stories of financial advisers and readers of The Wall Street Journal. Here is one: “I’ve been a dedicated saver and investor for 40 years, always practicing self-denial to the point that it’s extremely difficult to spend money. I honestly get uptight about small purchases that are insignificant. The difficulty is changing a mind-set that has gripped my thinking for four decades.”

To bring readers of the AAII Journal into the conversation around this area, here’s a look at some basic points I’ve put forward in the book to answer that first question: Why do people behave this way? Additionally, I include stories from people who agree—or who push back.

Hard to Grasp Tasks

Let’s start with the feeling of financial well-being, a feeling that we have as much money as we need. Some people with high financial well-being are wealthy, but many more are middle-class people who earn adequate incomes throughout their working years, save enough and spend their savings judiciously in retirement. Low financial well-being afflicts the poor, but it also afflicts spendthrifts who spend more than they earn and frugal people who slip into stinginess by excessive fear—depriving themselves, their families and the needy. One reader wrote: “Since I retired, every withdrawal from savings has been painful. So many articles are about the fear of not having enough … This article gave me hope and the thought to pursue joy with my money, not stew in fear.”

Pensions promote financial well-being. Those lucky enough to have them typically do not need to save much for retirement and do not fear running out of money. My parents were among the lucky. They left us their house, some mementos, precious memories and deep gratitude. I have the menorah that held the candles my mother would light every Friday night, and a painting that hung in the kitchen since I was a small child.

Fewer have pensions these days, and more have retirement savings in IRAs and 401(k) accounts. We bear the difficult task of saving enough during our working years and the equally difficult task of spending the right amount in each retirement year. These tasks are difficult, because spending needs and temptations abound during working years, while fear of running out of money haunts us in retirement.

Social Security provides some, even if insufficient, income to most retired people; mortgage-free houses provide shelter to those fortunate to have them; and Medicare and Medicaid pay much of medical expenses. But many are justifiably concerned about the cost of long-term care, reluctant to accept assistance from Medicaid and adamant about maintaining their dignity. My father would say, “When parents give to children, all smile. When children give to parents, all cry.” One retired parent wrote to me about “maintaining a certain amount of that capital to cover the possibility of long-term care expenses. One of the ‘gifts’ I intend to leave my children is never to be in a position where my wife or I do not have the resources to adequately take care of ourselves. If we never need it, great, the kids/grandkids can have it and use it however they want and I won’t be around to cringe.”

Our Mental Toolbox

We tackle the tasks of saving and spending with the mental tools of framing, mental accounting and self-control. We frame our money into distinct mental accounts, mainly “capital” and “income,” and set self-control rules of saving and spending. Income includes salaries, pensions, interest and dividends, among other sources. Capital includes houses, bonds, stocks and other investments. Self-control tools include automatic transfers from income such as salary to capital such as IRA and 401(k) accounts, automatic reinvestment of interest and dividends into mutual fund accounts and following the rule to “spend income but don’t dip into capital.”

Observations on Saving and Spending

  • Saving is difficult for the young; spending is difficult for the old.
  • The mental tools of framing, mental accounting and self-control help us save when we are young. The same mental tools harm us when we are old, as they can be obstacles to prudent spending.
  • If you derive no pleasure from spending on yourself, why not spend on your family and the needy?
  • It is better to give with a warm hand than with a cold one.

People who are fortunate enough to earn good incomes during their working years—and employ these mental tools successfully—accumulate substantial savings. But these useful mental tools can turn into obstacles in retirement when income diminishes and it is time to dip into capital. One extremely wealthy man, a retired insurance company executive, wrote: “I’ve struggled with boundary issues between income and capital. I’ve actually taken on a couple of board of director assignments so that I feel justified spending for what I consider extravagant.”

Self-Control Helps

Self-control is not easy to muster. Some fail to muster it at all. Wants for spending it all today overwhelm wants for saving for tomorrow when self-control is weak. National Football League (NFL) players enjoy very large income spikes that amount to substantial wealth, but wants for spending today often overwhelm wants for saving for tomorrow. Bankruptcy filings of many NFL players begin soon after the end of their careers.

Circumstances, especially poverty, can undermine self-control, breeding scarcity and narrowing options. These overload people’s cognitive and emotional resources and hamper saving, job performance and decision-making. Poverty is regularly exploited. For credit card companies, the most profitable American consumers are those on the verge of bankruptcy.

Some people are savers by nature and nurture. The “Big Five” personality traits that psychologists discuss are conscientiousness, neuroticism, extraversion, agreeableness and openness. Conscientiousness is the trait most closely associated with self-control. The retired insurance executive wrote: “The points on conscientious saving hit the nail on the head. I grew up as one of nine children of Depression-era parents. They always stressed education, achievement, savings and marital happiness over satisfying urges for material things.”

Excessive Self-Control Harms

Self-control can be excessive. Indeed, excessive self-control is as prevalent as insufficient self-control. Excessive self-control is evident in the tendency to spend less today than our ideal level of spending, driving us to extremes beyond frugality. The prospect of spending money inflicts emotional pain on tightwads even when it might otherwise be in their interest to spend.

The interplay between emotion and cognition is evident in functional magnetic resonance imaging of people who see a product followed by its price and then are asked to decide whether to buy it or not. Seeing the price caused greater activation in the brain’s insula among people who decided not to buy the product than among people who decided to buy. (The insula is the region associated with painful sensations such as social exclusion and disgusting odors.)

One person wrote: “What if the enjoyment is in the saving and the pain is in the spending?” Another wrote: “Every so often there are articles about people who have accumulated vast wealth relative to their lifetime income. When they pass at an old age and people find out, they feel sad for them—that they lived frugally and never spent it on anything. I sometimes think that they are missing the point. The total enjoyment for that person was in the saving and living miserly and frugally, well below one’s means. To a certain degree, I am that person.”

Moreover, excessive self-control can induce a mindset where spending is what irresponsible people do, reflected in this statement: “I’m saving now because good, admirable, upstanding people sacrifice their current standard of living to save, save, save for the future.”

We Spend Less as We Age, and We Die Sooner Than We Hope

Concern about running out of money is regularly exaggerated in inflated estimates of life expectancy. Social Security tables indicate that, on average, only one in 10 of today’s 65-year-old men will live to age 95. [Figure 1 shows a chart of Social Security’s life expectancies for men and women over time.] Yet one respondent wrote: “With discoveries in biotech rolling out of labs in droves, we may have reached a technological tipping point regarding life expectancy. I think today’s 60-somethings will easily live to be 100, maybe 110—and their children will probably make it to 150.” Reality, however, is still some distance away from the labs. The oldest-in-the-world woman, an Italian, died in April 2017 at age 117, followed by the oldest-in-the-world man, an Israeli, who died in August 2017 at age 113.



Figure 1. Life Expectancy From Year of Birth

Source: “Life Tables for the United States Social Security Area 1900–2100,” Felicitie C. Bell and Michael L. Miller, Social Security Administration.


 

Moreover, older people spend less, in large part because physical limitations make them less able to spend and because they are less inclined to spend for personal reasons. Spending at age 84, adjusted for inflation, is 23% less than it was at age 62 among college-educated American couples. Spending on movies, theatre, opera and concerts declines by more than 50% between the ages of 60 and 80. Spending on hearing aids, nursing homes and funeral expenses increases by more than 50%.

Another respondent wrote: “Lots of people lose a spouse and do not travel or vacation much because they are by themselves. They have enough money but just do not go anywhere or do much. They have lost their best friend and have not found a second life after losing their spouse. So, they sort of mope around and just do not do much. It is really sad. I know a few people in this situation and have tried to help, but there does not seem to be much you can do. We lose not only spouses, but friends … Suddenly we’re left to do things alone, or to not do them. Balance, while we have the resources to seek balance, is important to a fulfilling retirement.”

Spend Here Now

We need not feel guilty about spending our hard-earned savings on ourselves. As one reader wrote: “During my career I was a very conscientious saver and investor. I always maxed out my 401(k) contribution and put a large percentage of my salary and bonus into a deferred-compensation program. I have had a difficult time changing my mindset from a saver to a spender. This article helped me make that mental transition. The first thing I did was to go out and get fitted for a new set of golf clubs and I didn’t feel guilty about it!”

Some people derive no pleasure from spending on themselves. One wrote: “If one has never derived pleasure from material things, why would that change in retirement? A cup of coffee and a walk on the beach at dawn and I’m happy. The psychic income from being over-saved has value.”

I empathize with this person. I, too, like a cup of coffee and a walk on the beach, even if not at dawn. But why not share “over-saved” money with family and the needy? Someone who understands this wrote: “I learned from my mom that the greatest joy in life is giving to your family. She would give something to all six of her children, the grandchildren, the great grandchildren and all of their spouses on their birthdays, anniversaries, St. Patrick’s Day and Valentine’s Day, for no reason at all. If you want the closest thing to eternal life, try this.”

Another wrote about balancing spending on himself, his family and the needy: “I am deriving pleasure from assuming the strategy of ‘I am through saving. Now I am spending.’ Judiciously, to be sure, but nevertheless with a view to obtaining satisfaction. Thus, my wife and I have made some long-desired renovations to our home, schedule at least two major overseas vacations a year and supplement our children’s financial needs at a time when they need it and when I can see the result. I devote more time and financial support to charitable work. I continue to spend time exercising at a local athletic club, now free thanks to SilverSneakers. I read more and indulge in my love of classical music. All of this gives me significant satisfaction.”

Better Warm Than Cold

One reader faulted me for failing to “address preserving capital for the next generation, which is a priority for some of us octogenarians.” But why not give money to the next generation with a warm hand rather than with a cold one?

Some months ago, I was speaking to a large group of financial advisers about the difficulties that face well-off people when transitioning from work to retirement and from saving to spending. Several advisers walked over to me as I stepped off the stage to ask questions and share experiences. One stood aside, waiting until all the others have left. “I burst out crying when you said, ‘It is better to give with a warm hand than with a cold one.’” Indeed, she was crying when she spoke to me. It turned out that she lent her son some $27,000 for college tuition and now demanded that he pay her back by the agreed schedule. She reasoned that paying by schedule would benefit her son, teaching him financial responsibility. But the son was now financially squeezed, at the beginning of his career, lacking even money to buy his girlfriend an engagement ring, and his mother’s demand had soured their relationship. The mother had more than enough money to forgive the loan without imposing any hardship on herself, giving with a warm hand rather than with a cold one. I hope this is what she did that day.

One last story with a lesson: “My husband was reared by extremely thrifty parents who survived the Great Depression and World War II, and through hard work and frugality bordering on stinginess (all Christmas gifts came from the Salvation Army) they accumulated a very comfortable nest egg. They passed on to him their fiscal philosophies and my husband absorbed them like a sponge.

“My husband handled our finances. Once he died and I took over the finances, I was amazed at how much money we had. I shall have to work very hard to spend all of it, but I plan to give it my best effort. In the two-and-a-half years since my husband died, I have been to Africa and made three trips to Europe. I have already booked trips to see lowland gorillas in Rwanda and Uganda, snow monkeys in Japan, penguins in Antarctica and ride a horse across the Mongolian steppes. These trips were booked after my doctor told me that based on her patients, 80 is the age at which people lose their energy and enthusiasm for traveling. I am attempting to get in as many trips as I can before hitting that mile marker.

“I have also made many donations to local charities and plan to set up a trust fund for a friend’s grandchild who has Down syndrome and would otherwise become a ward of the state when his hand-to-mouth-existence parents die.

“My husband never reaped any benefits from his saving habits and only received three months of Social Security before dying. May others escape his fate.”

Discussion

Dan Burnett from CA posted over 8 years ago:

I was interested in the premise of this article and considering purchase of Dr. Statman's book until I saw Fakespot's assessment of the veracity of the Amazon Reviews on the book: https://www.fakespot.com/product/finance-for-normal-people-how-investors-and-markets-behave I hope Dr. Statman is not part of the deception in the reviews and I will check back on the reviews in a few weeks to see if they seem more legitimate. I would like to explore an honest treatment of the topic in more depth.


Dale from TN posted over 8 years ago:

I cannot imagine anything worse than overspending in retirement. Actuarial tables are just calculated estimates of life expectancy, given a rather large population or sample set. Though I am not "planning" to live to 100, our spreadsheets all anticipate that as the life expectancy in our forecasts. To use the government forecasts could be catastrophic if you spend to those targets of longevity. While in retirement, I adjust annually, all expense forecasts based on previous 3 years averages, anticipate RMD withdrawal requirements, then construct inflation adjusted and necessary expense model to maintain life style, anticipated medical increases, and additional discretionary expenses to "splurge" as the author suggests. A very simple spreadsheet spreads inflation of funds over the expected target of 100 for me, and 105 for my spouse such that the balance is allocated appropriately to heirs. Of course one has to adjust for inflation, COLA, investment returns, etc. over that span of time. Sharing the spreadsheets with spouse and children is of paramount importance, particularly the assumptions made in their development. It is also important to understand the many models that are out there on the internet that do not best-case, worst-case scenarios inclusive of all factors.


Chuck from WI posted over 8 years ago:

I finally sold my last business just before my 78th birthday in Nov. Since then We (my wife & I) have been one road trip, a trip to Punta Cana and leave on another road trip in 2 weeks & then 17 days in Europe next month. We have always been travelers, but are upping the ante while we are mobile. We will be forced to limit our travels down the road and probably learn to be "trifty". But Grammi won't scrimp on the grandkids I'm willing to bet! We aren't blowing the "wad" foolishly, but are planning to be solvent for 15 more years


Karyl Magee from VA posted over 8 years ago:

I understand that the powers that be are ever seeking for ways to get the Boomers to part with their hard-earned cash to prop up the economic mess that the powers that be allowed to happen in the first place. However, if you take a walk around any large city and many smaller ones in this country, you will be overwhelmed with the sight of folks living on the streets or pitching their tents around under bridges and in the parks and forests whereever they can find the room. Many of these people had to "overspend" their savings when they got hit with the economic realities of losing their house, their jobs, or having to work for companies that did not offer them health insurance and IRA's--that is, if they were fortunate enough to have a job at all that paid more than minimum wages. Most seniors have lived long enough to know that one's future well-being is left up to that individual, and that welfare programs can come and go at the drop of an administration. When someone has worked all their life on several jobs at the same time to get enough ahead to pay for rent, food and transportation, that leaves enough of a scar on one's consciousness that one gets mighty reticent about throwing it all away on trifling things that, like a bag of potato chips that costs $2.48 for the privilege of buying a 7.75 oz bag full of air, salt and grease (and now they are placing fewer and fewer chips in each bag)---(http://time.com/3030517/pepsico-lays-fewer-chips/), and we have gotten wise to the game and we can now make choices as to which games we want to play. No, sir, not all retired folks are part of the 1%. Those that are have every right along with the freedom to live like Saudi princes should they so desire. Don't go pushing that trip on the rest of the Boomers: https://www.forbes.com/sites/patrickwwatson/2017/10/12/boomers-are-not-saving-enough-for-retirement-neither-is-the-government/#4f3d5e611a4d


john from Calif posted over 8 years ago:

I do not find it necessary to spend very much money to be happy or content but I do think it's challenging to feel financially secure no matter how much money you accumulate. From a knowledge standpoint I know I have plenty of resources yet from an emotional standpoint I don't feel completely secure, yet I suspect that I could have twice the recourses that I have now and I would not feel any more secure. So what to do about this? My imperfect solution is to not deny myself comforts and to give to people I care about without worry. At the same time I evaluate whether or not something I purchase really made my life better or made me or the people I love happier or healthier and that informs my future decision making.


Paul V from MD posted over 8 years ago:

Good article! While it's true that there are some people who saved little or nothing for retirement, most people I know have sufficient funds (including Social Security) to have a pretty comfortable retirement. In fact, the government's formula for calculating RMDs (which requires withdrawal of more money from retiree's IRAs as they age) ends up coming up with some big numbers as 80 years of age rolls around. We retirees would do well to consider distributing some of our wealth to our children while it will do them some good, with 'warm hands.'


Vic from IL posted over 8 years ago:

I have always saved money and lived below my means. Because of this, and prudent investing mostly in bonds, I was fortunate enough to semi-retire at age 52, fully retire at age 62. What joy! (Even more joy now that interest rates have been going up :) Where as I may not have been overly generous with my money, I have had the luxury of being generous with my time, being there for family and friends, volunteering, etc. Saving money, living frugally, and smelling the roses along the way is a wonderful habit to get into. Less stress on myself, my family and the environment.


Fernando Robles from FL posted over 8 years ago:

Hmm. I wonder why people who worked all their lives, saved and invested to have a relatively safer retirement are called "fortunate," yet the lazy bum who threw away his money on dope, booze, etc., thinking perhaps that "you can't take it with you" is called "needy?"


Michael Birmingham from NY posted over 8 years ago:

Article suggests some retirees do not spend enough. It is true. Hard to shift gears to more spending after a lifetime of saving. Points well made. It might help persaud us to spend more if some dollars of income and expenses attached. It is a matter of grave concern if spending within a few percent of income and savings are underpar, say less than a year's annual expenses. It is another matter to say spending in retirement below income and savings are multiple years of annual expenses. Some folks better spending more in retirement. One expense is for health improvement and another is directing money to worthwhile causes that the retiree studies and makes good decisions on. A problem when retirees put off spending rather than do the work required to making spending a productive and logical outcome of a life of saving and investing.


Dave Gilmer from WA posted over 8 years ago:

It is true that many hold onto their money just a little too tightly, but in some respects this is justified by the fact we cannot know the future and how much money we will need. I had a friend who insisted on planning retirement to the age of 104. I thought this quite unnecessary until I really considered the "math" of the situation. If you can survive 40 years in retirement you could really survive 60 with the same portfolio as the portfolio has to be built to essentially last forever.


Robert Rea from AZ posted over 8 years ago:

I would spend more on myself if the return was better. More often than not, I'm disappointed with my purchases as they were sold on the over-promise and explain later premise, and worse I occasionally find myself with a long term maintenance issue. Over time I've found I'm happier if I limit my purchases to only what I need and in most cases that means just replacing what breaks. Travel is fun with the right person, but involves standing in too many lines, sitting in too many uncomfortable chairs, and sleeping in uncomfortable beds. When I was younger, hotels were often nicer than my apartment. Now they cannot match the comfort and convenience of home. I find no joy in paying $8 or more for a soft drink from the in room refrigerator. For those that are finding happiness in spending on themselves, I'd be interested in more information on where they feel they get the best bang for their buck.


Craig from WI posted over 7 years ago:

As a newer 65 year old retiree and after having run every calculator, built God knows how many Excel sheets buying "expert" consultation and reading every article on retirement I could find, I have come to the conclusion that folks who have the discipline to plan & save will mostly have the discipline to spend just as wisely. They know how to live within or just below their means and more importantly, they know how to make adjustments on the fly. Overly specific plans that extend beyond a few years may be intellectually satisfying but are mostly useless owing to the rapidly changing world we live in. Paying attention, reading, listening and make the proper common sense assessments will prove to be the difference in living a great retirement and no matter its length. Simply put: operating our financial lives as a business by paying attention to the important things will allow us to do fine unless something so terribly dramatic takes place that nothing else will matter. And I am thankful for the choices this country ultimately still provides.


Ram from NJ posted over 7 years ago:

For many of us who HAD to work - and many corporate jobs are essentially modern day indentured labor - it is important to make sure that our children and theirs do have a choice to walk away if they don't like it or to pursue the dream of being independent entrepreneurs and not be beholden to an employer. That is a good reason for us to live modestly even in retirement to save some for them, and there is nothing wrong with it. This is a value I would like to see handed down to our generations along with the value of sharing our good fortune with the needy in significant ways.


Ram from NJ posted over 7 years ago:

For many of us who HAD to work - and many corporate jobs are essentially modern day indentured labor - it is important to make sure that our children and theirs do have a choice to walk away if they don't like it or to pursue the dream of being independent entrepreneurs and not be beholden to an employer. That is a good reason for us to live modestly even in retirement to save some for them, and there is nothing wrong with it. This is a value I would like to see handed down to our generations along with the value of sharing our good fortune with the needy in significant ways.


Ken Langtry from TX posted over 7 years ago:

Craig, my wife and I are 87 and have handled our investments and retirement pretty much as you suggested, and we have done well and plan to leave a substantial amount for our children, grandchildren and great-grandchildren. One thing I would encourage more to do if possible is to contribute to Roth IRAs. Some time ago we paid a substantial amount to convert from a standard IRA to a Roth. It was difficult at the time, but now we are enjoying not having to pay taxes.


Don Brown from VA posted over 7 years ago:

In my high tax area and with inflation in mind as well as very long lives of our parents and grandparents, I think it wise to be very conservative with retirement spending.


Brian Mahon from NY posted over 7 years ago:

The main problem with this analysis is Statman's use of a longevity table that calculates life expectancy from birth. This sort of table includes in its calculations infant mortality rates as well as deaths from accident and injury and illness earlier in life than in old age. If we have reached 65, our life expectancy is around 84 for men and 85 for women and that's the median life expectancy--half will live longer. There is actually a better than 50% chance that we will live longer than that if we have reached 70 in reasonably good health, and there is a more than 20% chance that one member of a couple that has survived to 65 will live past 92. Statman's analysis confuses life expectancy at birth with expectable longevity limits. When life expectancy was around 40 years old, there were still people living into their 80's if they survived war, natural disaster, infant mortality, and accident and illness when they were younger. Go to any major museum and look at the artists' life span for almost any century if you have confused life expectancy, an average, with longevity that can be expected if you get older to begin with. Everyone didn't knock off at 40. Statman makes valid points about lower costs in late old age and not being too fear based in our planning, but his use of a life expectancy table starting at age 0 is fatally flawed and queers his whole analysis.


JACK E from TX posted over 4 years ago:

Remembering that Yellen declared inflation in 2022 as only transitory and a battery of the President's economists pronounced a new age of prosperity under the Build Back Better Program, I am cautious to believe everything I read and hear. While there is a grain of truth to parts of the article, there are some other facts missing. 28% of those in their sixties have less than $50,000 saved for retirement. 10% have $50,000 to $99,000 saved; 36% have $100,000 to $500,000 saved. So 74% of retirees are in peril of not having money to last through their retirement years. Should inflation continue at all time highs, projected to be 16 to 20% from 2021 into 2022, way over the normal 2%...the money saved by the retiree is very likely to lose 25% of its value over the next five years. Your $500 000 would only be worth $375,000, while have to use that same money for monthly bills. I think you are now getting the idea. For 74% they would find their selves short after a few years of following the advice in this article. For the rest, enjoy the "good times". Dr. Jack


CRAIG B from WI posted almost 2 years ago:

As to the section titled "Observations on Saving and Spending" the first and third points are in my world the most important and applicable. I have taught our children the concept of saving and my youngest son teaches me on spending ("SPEND IT, dad!!!"). After reading an article on the enjoyment obtained by seeing one's assets used by heirs, family members, charities and even friends WHILE STILL ALIVE was a lightning bolt at age 70. We helped pay off a son's small remaining mortgage, supplied a bridge loan to buy a house needing a signed offer in two weeks (the nightmare housing market of 2023-2024 demanded it) and then taking on the small mortgage at a couple points lower than the bank's and within IRS guidelines allowed us to watch their growing family get into a proper size of a house, improve a budget based on a teacher's salary and mostly, to see them all enjoy the heck out of the new home. If your assets and budgets can handle it, I heartily suggesting doing something similar.


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