What if your biggest financial mistake in retirement isn’t running out of money, but holding on to so much of it that you never get to enjoy the life you worked so hard to build? It might sound strange, especially after spending decades worrying about inflation, stock market crashes, rising living costs, and whether your savings will last as long as you do.

But research suggests that many retirees are spending far less than they can actually afford. Instead of gradually using their savings to enjoy retirement, they continue accumulating wealth, sometimes leaving behind substantial amounts of money they never needed to save in the first place.

The problem isn’t always a lack of money or poor financial planning. Sometimes, it’s the difficulty of switching from a lifetime of saving to finally allowing yourself to spend what you’ve earned.

Why Retirees Struggle to Spend Their Money

Think about how most people approach retirement. You spend 30 or 40 years working, contributing to your retirement accounts, building your savings, and watching your investments grow, all with the goal of eventually having enough money to stop working.

Then retirement arrives, and everything changes. Instead of watching money flow into your accounts every month, you suddenly have to start withdrawing it to pay for your everyday expenses, travel, hobbies, and other things you want to enjoy.

For many people, that transition feels uncomfortable. After spending decades developing the habit of saving, watching your account balance decrease can feel like you’re doing something wrong, even when your financial plan says you can afford it.

A study published in the Journal of Financial Planning, titled Spending in Retirement, Determining the Consumption Gap, explored this behavior among affluent retirees. Researchers found that many weren’t even spending all their annual investment income, let alone using the money they had accumulated over their working years.

Between 2000 and 2008, a period that included the dot-com crash and the global financial crisis, the average financial assets of these retirees actually increased. Even during one of the most challenging periods for investors, many continued accumulating wealth rather than spending it.

Researchers refer to the difference between what retirees can afford to spend and what they actually spend as the consumption gap. In other words, people may have enough money to enjoy a more comfortable retirement, but their fear of running out keeps them from using it.

According to the Employee Benefit Research Institute’s 2024 Spending in Retirement Study, 38% of retirees said they were holding back on spending to prepare for unforeseen expenses. Meanwhile, only 11% described themselves as having a spending mindset, suggesting that the habit of saving often continues long after people stop working.

Of course, not every retiree who spends cautiously is making a mistake. Unexpected medical bills, long-term care, inflation, and other financial uncertainties are legitimate concerns, but being cautious without understanding what you can actually afford may prevent you from enjoying the retirement you spent decades preparing for.

Your Retirement Savings May Keep Growing After You Stop Working

Many people assume their retirement portfolio will immediately begin shrinking once they stop working. After all, you’re no longer contributing to your savings, and you’re now withdrawing money to cover your living expenses.

However, investment growth can sometimes outpace withdrawals, especially during the early years of retirement. This means your portfolio can continue growing for years, even while you’re using it to fund your lifestyle.

Consider someone who retires with a $1 million investment portfolio and wants to spend the entire amount over a 30-year retirement. Under a hypothetical plan using an initial annual withdrawal of $61,000, adjusted for 3% annual inflation, and an assumed 8% annual portfolio return, the account balance may continue increasing for roughly a decade before reaching its peak.

In this example, the retiree might not begin spending the original investment principal until around year 17. That means more than half of the planned retirement could pass before the retiree starts using the money originally invested.

The reason is that investment growth can initially exceed the amount being withdrawn. Meanwhile, the portfolio continues building a cushion to help cover future withdrawals, which generally need to increase over time as inflation pushes up the cost of living.

These figures are based on specific assumptions, not guaranteed investment outcomes. Actual returns fluctuate from year to year, and a poor sequence of returns early in retirement can produce a very different result.

Nevertheless, the example illustrates an important point: your retirement portfolio doesn’t necessarily have to shrink immediately just because you’ve started spending your savings.

Why Following the 4% Rule Could Leave You With More Money Than You Need

Many retirees have heard of the 4% rule, a popular retirement planning guideline suggesting that someone withdraw around 4% of their initial portfolio in the first year of retirement and adjust subsequent withdrawals for inflation. The idea is to provide a starting point for generating retirement income while reducing the risk of exhausting your savings too soon.

However, withdrawing 4% of your portfolio may result in considerably less spending than someone following a plan designed to use up their assets over a 30-year retirement. When investment returns are favorable and withdrawals remain relatively modest, the portfolio may continue growing for a long time.

In some scenarios, retirees following this approach may not begin spending their original principal until the final decade of retirement. Others may never substantially draw down that principal at all, particularly if investment growth continues to offset their withdrawals.

Life expectancy also plays a role in this situation. A 65-year-old may live into their 80s, while a married couple has a reasonable chance of having at least one partner live into their 90s, making longevity an important consideration in retirement planning.

However, some retirees pass away around the time their portfolio would only just be starting to decline. If they spend most of their retirement living on investment income and modest withdrawals, they may leave behind a substantial portion of the money they accumulated.

That doesn’t necessarily mean the 4% rule is wrong or that retirees should abandon conservative withdrawal strategies. It simply means that a strategy designed to protect against running out of money may also result in spending less than necessary to enjoy retirement.

Required Minimum Distributions Can Keep Your Wealth Growing

Retirement accounts can make the situation even more interesting, particularly when it comes to required minimum distributions, commonly known as RMDs. These are mandatory withdrawals that apply to certain retirement accounts under specific rules, generally beginning at a designated age.

The challenge arises when retirees are required to withdraw money from their retirement accounts but don’t actually need it to cover their living expenses. Instead of spending the money, they may transfer what remains after taxes into a regular taxable investment account.

As a result, money moves from one account to another without necessarily being used to improve the retiree’s lifestyle. Although the withdrawal may create a tax liability, the underlying wealth can remain invested and continue growing.

This is one reason why a retiree’s total wealth may remain substantial even after years of withdrawals. The money is technically leaving one account, but it isn’t necessarily leaving the person’s overall investment portfolio.

For retirees in this position, understanding how their required distributions, taxes, and living expenses work together can help them make better decisions about how to use their wealth.

The Hidden Cost of Underspending in Retirement

Leaving money to your children, grandchildren, or other loved ones can be a wonderful goal. However, there is another side to accumulating more wealth than you need, and it involves the experiences you may miss while you’re still able to enjoy them.

Research discussed by retirement spending experts David Blanchett and Michael Stein suggests that real spending in retirement tends to decline by approximately 1% per year on average. This pattern is often described as the retirement spending smile, reflecting how spending changes as people move through different stages of retirement.

The early years are often called the go-go years because retirees tend to have more energy, better mobility, and a greater desire to travel, explore new places, and pursue activities they’ve postponed during their working lives. These are the years when you may be most excited about taking that European vacation, visiting family, trying new hobbies, or spending more time with your grandchildren.

As you move into your 70s, you may enter what’s commonly described as the slow-go years. Travel and other activities may become less frequent, and your spending may begin to decline as your priorities and lifestyle change.

By your 80s, the no-go years may bring further changes in mobility, health, and daily routines. Although everyone’s experience is different, you may no longer have the same desire or physical ability to enjoy the activities that once seemed so appealing.

This is where the real cost of underspending becomes clear. You might leave behind a larger inheritance, but you could also miss experiences that would have brought you joy when you were younger and healthier.

Money is valuable because of what it allows you to do, whether that’s spending time with loved ones, exploring the world, or making lasting memories. If you spend your entire retirement protecting your savings without ever enjoying them, you may end up with more money than you need but fewer opportunities to use it meaningfully.

How to Know When You Can Afford to Spend More

The first step is to recognize that a growing investment portfolio during the early years of retirement isn’t necessarily a bad sign. If you’re making reasonable withdrawals and your balance continues increasing, it may simply mean that your investments are growing faster than you’re spending.

However, you shouldn’t assume that every growing portfolio means you can safely increase your spending. Your future financial security depends on several factors, including investment returns, inflation, taxes, healthcare costs, and how long you may need your money to last.

That’s why it’s important to understand your actual financial situation rather than relying entirely on general retirement rules. A comprehensive financial plan can help you determine how much income you can reasonably expect from Social Security, pensions, investments, and other sources.

Your plan should also account for taxes, inflation, healthcare expenses, and unexpected costs that could affect your financial future. Once you understand how these factors fit together, you’ll have a clearer picture of what you can afford to spend without putting your long-term security at unnecessary risk.

Another useful approach is to allow some flexibility in your spending. For example, if you’ve been retired for five years and your portfolio has grown substantially beyond your original expectations, you could review your financial plan to determine whether you have room for a special trip, a family vacation, or another meaningful experience.

This doesn’t mean you should spend recklessly whenever the market performs well. Instead, it means being willing to adjust your lifestyle when your financial circumstances support it, rather than automatically sticking to the lowest possible spending level.

Most importantly, consider the limited window you have to enjoy certain experiences. The philosophy explored in Bill Perkins’ book Die with Zero encourages people to think carefully about how they balance their wealth with the time and health they have available.

You don’t have to spend every dollar before you die to benefit from this idea. The goal is to recognize that some experiences are more enjoyable when you’re younger, healthier, and physically able to participate in them.

A trip to Italy at 65 may offer opportunities for adventure, exploration, and memorable experiences that would be more difficult to enjoy at 85. The point isn’t that one age is necessarily better than another, but that money cannot always replace the time and physical ability required to enjoy certain activities.

Retirement Is About More Than Protecting Your Money

For decades, you’ve probably heard that saving money is essential to achieving financial security. You’ve been encouraged to contribute to retirement accounts, avoid unnecessary expenses, invest for the future, and prepare for unexpected financial challenges.

Those habits can help you build a solid financial foundation. However, retirement introduces a different challenge because the goal is no longer simply to accumulate as much money as possible.

At some point, your financial plan needs to shift from protecting your savings to using them to support the life you want to live. That might mean traveling more, helping your family, pursuing hobbies, or simply enjoying the freedom to spend your time doing things that make you happy.

Of course, protecting yourself against unexpected expenses remains important. You still need a reasonable financial cushion, a plan for healthcare costs, and enough resources to support yourself if you live longer than expected.

The key is finding the balance between preparing for tomorrow and enjoying today. A retirement plan should provide financial security, but it should also give you the confidence to make the most of the years when you have the health, energy, and desire to do so.

Conclusion

If you’re approaching retirement or have already retired and your investment portfolio continues growing, it’s worth asking whether you’re saving more than you actually need. The research discussed here suggests that many retirees spend less than they can afford, not necessarily because their finances require it, but because the habit of saving is difficult to break.

A growing portfolio doesn’t automatically mean you should spend more, but it is a reason to review your financial plan and understand what your money can realistically support. Once you have a clear picture of your income, expenses, taxes, investments, and future needs, you may discover that you have more freedom than you thought.

Remember that retirement involves two finite resources: time and money. You can sometimes earn more money or grow your investments, but you cannot get back the years you’ve already spent.

Ultimately, retirement planning isn’t just about making sure you never run out of money. It’s also about making sure you don’t spend your entire life accumulating wealth only to leave behind money you could have used to create wonderful experiences, strengthen relationships, and enjoy the life you worked so hard to build.