How People Spend Money In Retirement

Introduction 

For decades, retirement has been portrayed as a long-awaited vacation; a reward after a life of hard work. However, financial reality often complicates that dream. With increased longevity, inflation, healthcare costs, and shifting investment returns, how people spend in retirement has become a critical topic of both personal and public interest. 

In this post, we’ll explore three angles on retirement spending: the psychological hurdles many retirees face, how traditional withdrawal strategies like the 4% rule may need updating, and the spending categories that often increase, sometimes unexpectedly, after retirement begins. By integrating findings from Morningstar, Charles Schwab, and Kiplinger, we aim to give you a holistic understanding of how to plan your financial future with confidence. 

The Psychological Shift: From Saving to Spending 

Most retirees have spent their entire lives in saving mode. From their first job to their last, the emphasis has always been on budgeting, avoiding debt, and building wealth. So what happens when the game changes? 

According to behavioral research highlighted by Morningstar, many retirees struggle to make the emotional transition from accumulating assets to depleting them. This psychological resistance often leads to underspending, even when retirees are financially well-prepared. 

Why Do People Underspend in Retirement? 

• Fear of Running Out of Money: Even with solid retirement savings, the fear of unknowns (like healthcare emergencies or market downturns) can cause people to overly restrict their spending. 

• Identity Tied to Frugality: People who built their wealth by being disciplined spenders often carry that mindset into retirement. 

• Lack of Confidence in Financial Planning: Without a clear, adaptable retirement plan, retirees may default to the most conservative path: spending less. 

This psychological hurdle isn’t just a mild inconvenience, it can affect quality of life. Some retirees skip trips, avoid hobbies, or forgo needed home improvements simply because they can’t emotionally justify spending their own money. 

Strategies to Overcome It 

• Bucket Strategies: Dividing your assets into “spending buckets” by time horizon (e.g., short-term cash, medium-term bonds, long-term growth) helps bring clarity and peace of mind. 

• Guaranteed Income Streams: Tools like annuities or maximizing Social Security can ease the fear of running out. 

• Regular Financial Check-ins: Updating your plan annually with a financial advisor helps adapt to new circumstances. 

Beyond the 4% Rule: Rethinking Safe Withdrawal Rates 

For decades, the 4% rule has served as a foundational retirement planning tool. Coined in the 1990s by financial planner William Bengen, it suggests that retirees can safely withdraw 4% of their retirement portfolio in the first year, adjusting for inflation each year thereafter. However, a recent article from Charles Schwab argues that this rule is increasingly outdated. Why? Because today’s retirement landscape is vastly different: 

What’s Changed? 

• Longevity: Many people are living into their 90s or beyond, which extends the retirement period to 30–40 years. 

• Low Interest Rates: Bonds and savings accounts yield less than they did in the 1990s. 

• Market Volatility: The past two decades have seen two major bear markets and record highs—volatility is the new norm. 

• More Flexible Spending Patterns: Retirees don’t necessarily spend the same amount each year. Spending tends to peak early, decline mid-retirement, and rise again in later years due to healthcare costs. 

Dynamic Withdrawal Strategies 

Instead of using a static withdrawal rate, Schwab and others recommend more dynamic methods: 

• Guardrails Approach: Spend more when markets are strong and tighten the belt during downturns. 

• Percentage of Portfolio: Withdraw a fixed percentage each year based on your portfolio’s current value; this can add flexibility and sustainability. 

• Floor-and-Upside Planning: Cover basic needs with guaranteed income sources, then use investments for lifestyle extras. 

The goal is to optimize spending without compromising future security. In most cases, retirees can afford to spend a bit more, safely, than they think, especially in their earlier years. 

Where Retirees Actually Spend More 

A practical dimension to this topic is understanding which expenses go up in retirement. According to Kiplinger, many people are surprised by how spending patterns shift after leaving the workforce. 

Key Areas of Increased Spending 

1. Healthcare 

   1. Medicare doesn’t cover everything. Premiums, supplemental insurance, prescriptions, dental, vision, and long-term care can add up. 

   2. According to Fidelity, the average retired couple will need over $300,000 for healthcare expenses alone in retirement. 

2. Travel and Leisure 

   1. Early retirement is often a time for “bucket list” experiences: cruises, international trips, road trips to visit grandchildren. 

   2. Even domestic travel costs (hotels, gas, dining) can add up quickly, especially if done frequently. 

3. Home Expenses 

   1. You may no longer have a mortgage, but property taxes, maintenance, remodeling, and energy bills can rise—especially as retirees spend more time at home. 

4. Gifts and Family Support 

   1. Many retirees help adult children with weddings, down payments, or student loans. Grandchildren’s birthdays and holidays can also become major budget items. 

5. Technology and Entertainment 

   1. Streaming services, new devices, hobby supplies, and classes (art, fitness, learning) are increasingly common expenses for today’s active retirees. 

What Typically Decreases? 

• Work-related expenses (commuting, clothing) 

• Payroll taxes 

• Mortgage (if paid off) 

• Retirement savings contributions 

Still, the increases often outweigh the decreases, especially in the early years. That’s why a flexible spending plan is crucial. 

The Retirement Spending “Smile” 

Combining the above observations, a pattern emerges that some call the retirement spending smile. Spending tends to: 

• Start High: Travel, hobbies, and lifestyle upgrades right after retirement. 

• Dip in the Middle: As people settle down and become less active, spending slows. 

• Rise Again Later: Healthcare and support costs rise sharply in advanced age. 

Understanding this curve allows retirees to time their spending wisely—and avoid either overspending too early or hoarding too much for a “someday” that may never come. 

Putting It All Together: A Smarter Approach 

So, how should you plan to spend in retirement? Here are some consolidated tips: 

1. Know Yourself 

Understand your psychological tendencies. Are you likely to overspend or hoard? Your personality plays a big role in your financial comfort. 

2. Build in Flexibility 

Don’t let a rigid rule like “4%” determine your lifestyle. Plan for ranges, not absolutes. 

3. Budget in Real Life Terms 

Include categories like “helping kids,” “bucket list trips,” or “remodeling the kitchen.” Realistic budgeting builds trust in your plan. 

4. Create Guardrails 

Set upper and lower spending limits to adjust during good or bad market years. 

5. Revisit Annually 

Update your financial plan once a year. A small tweak now can save big headaches later. 

Final Thoughts 

Retirement isn’t just a financial phase, it’s an emotional and lifestyle transition. The most successful retirees are those who balance cautious planning with joyful spending. They allow themselves to enjoy the fruits of their labor, confident that their future is secure. By understanding the psychology of spending, challenging outdated rules, and preparing for real-world expenses, you can craft a retirement that’s not only sustainable, but richly satisfying. 

Providence Capital LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.