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The psychological shift from saving to spending in retirement

The narrative of a miserly, Scrooge-like figure hoarding his wealth for years instead of enjoying his retirement might seem unbelievable—but unfortunately, it isn’t relegated only to fiction. It’s a cold reality for many retirees.

Although most retirees’ stories aren’t as dramatic as Scrooge’s, it’s not uncommon for retirees to have more than enough to live comfortably for the rest of their lives but still think a vacation is out of the question. In fact, a number of retirees actually experience a sharp decrease in spending and increase in savings in retirement.

According to the Life Cycle Hypothesis, this shouldn’t need to happen. A retiree who is financially prepared for retirement should keep a consistent income in retirement, and overall consumption should not change. So why does this conundrum—known as the retirement consumption puzzle—happen, and what can we do about it?

Who is struggling to spend their retirement income?

About 25% of retirees fall into the camp of people who decrease spending during retirement. So although this doesn’t impact a majority of retirees, it’s still a meaningful number, and it’s concerning to see so many people not enjoying the fruits of their labour.

Moreover, research suggests this problem may worsen. Researchers found that the issue was most pronounced with individuals who use their own savings for retirement income—whereas people with guaranteed sources of income, such as annuities or the age pension, were more likely to spend their income.

Thus, as more retirees (in some cases unwillingly) use super for their retirement savings, the group of 'decrease spenders' may grow.

Why do people have trouble shifting from a saving to spending mindset?

The idea of a person hoarding their money in retirement is not new, but researchers still haven’t been able to pinpoint the exact cause. There are plenty of theories, though—some with more support than others.

One line of thinking posits that people simply don’t need to spend as much in retirement. For example, when people retire, they may experience a drop in work-related expenses. They may be able to spend more time doing things they had to pay for in the past—now making meals at home or mowing their own lawn—and searching for the best deals for their purchases. And they may pay off their mortgage, thus decreasing their expenses.

Another line of thought points to more psychological reasons behind a change in spending patterns.

Before retirement, a person may be more susceptible to present bias (the tendency to focus more on the present situation at the expense of long-term planning) because their future labour income is uncertain, and they don’t yet feel an ownership of that money. That uncertainty gives them the flexibility to think things like, “I’ll work more hours next month to make up for this trip,” or “My boss will cough up that bonus soon.”

However, after retirement, they are on a fixed income and the money they are spending is coming from their own pocket. This shift triggers loss aversion—that is, the desire to avoid losses outweighs the desire to experience gains. In retirement, we know that overspending today will result in a sure loss in future consumption. In a world where that future you is 85 years old and unable to work, that future loss looms much larger than an extra extravagance today.

This bias may be further aggravated by the fact that though your future retirement income is certain, your future expenses are uncertain. These stressors may push retirees to remedy preretirement overconsumption, thus prompting them to spend less.

How to manage retirement spending woes

Each of these theories has some merit, but none of them completely solve the retirement consumption puzzle. I believe that there is no one culprit behind the retirement consumption puzzle because no one retiree is the same.

For example, for Scrooge, the loss aversion theory may fit the bill. He became so preoccupied with the dollar amount he has that he ended up drastically underspending in retirement. But because every retiree is different, and different explanations may ring true based on their personal circumstances, retirees may benefit from taking stock of their retirement spending.

This exercise may help you understand if your spending is lining up with your retirement funds and needs. In some cases, that might mean that not spending all of your monthly retirement allocation is 'OK'.

Step 0 is to gauge your financial affairs and have a clear understanding of how much you can spend. Assuming Step 0 is complete, here are three ways to diagnose if you have a retirement underspending problem:

  1. Refer back to your financial goals and life values (and if your financial goal was to retire, it’s time to set new ones). Consider: Are you meeting your financial goals given your current spending? Are you upholding your life values? If your life value is to experience new cultures, is your current spending allowing you to do that?
  2. Try tracking your spending using an online tool that breaks down spending by category. It’s ideal to do this before you retire, but not essential. On a quarterly basis, check your overall spending and take note of any categories where your spending patterns have changed. Do these changes align with your financial goals? Did your spending on eating out suddenly drop, even though you love trying new cuisines with friends?
  3. Take a moment to recognize your emotions when spending your retirement income. (Research finds that retirees who underspend are more likely to be worriers.) Are you constantly pinching pennies and afraid to spend?

The pieces to the retirement income puzzle

If you fall into the underspending camp, research suggests that people using guaranteed income sources are more willing to spend their income.

Although the causes of the relationship between annuitizing and spending are still up in the air, there are a couple of theories.

For example, maybe people with an annuity feel they have more of a “license to spend” because they know they will always have money coming in. Or, maybe this phenomenon relates to how retirees think of their payments: If a payment comes from an annuity, it may feel like it’s someone else’s money they are spending (akin to labour income they earned before retirement). Since it’s not coming out of their own pocket, they may not be as prone to loss aversion and thus more at liberty to spend.

If you don’t want to take the leap to guaranteed income sources, try reframing your retirement income as a paycheck that someone else is paying you.

You can also try refocusing on your financial goals and life values. Put your goals and/or values on a Post-it note and stick it on your fridge, put them in your wallet, or add them to the notes app on your phone. Constant reminders of why you need to spend money—whether it’s to buy a condo near your grandchildren or to book that trip to Italy to taste authentic Italian cuisine—can be the nudge you need to make sure you make the most of your retirement.

Although not spending enough money in retirement may not be a universal problem, it does represent a huge, missed opportunity for the retirees in question. It’s important to remember that this is the money you’ve spent years toiling over and protecting. Now, during a long and happy retirement, is the time to put that money and free time to good use, funnelling both resources into your version of a life well-lived.


Samantha Lamas is a behavioural researcher at The author does not own shares in any securities mentioned in this article. This article is general information and does not consider the circumstances of any investor. Originally published by Morningstar and edited slightly to suit an Australian audience.

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June 14, 2024

Samantha, thanks for the article.
Certainly every retiree is different – different pre-retirement life and different life in retirement.
The important issues re ‘different life in retirement’ are finances, health, family, interests, and attitudes.
In pre retirement life, spending was characterised by prioritising necessities, value-for-money, and avoiding waste, All sound attitudes (not greatly in evidence today) and, for me, they haven’t changed much in retirement.
Many might look forward to travel; I travelled in 38 countries before retirement and lived and worked in 5 countries. This latter experience far outweighed the ‘travel-and visit’ experience but is no longer a priority or possibility. There are now more than three times as many people on this planet than when I was young and they travel more. The places I was fortunate enough to visit and enjoy are now crowded, and some overwhelmed and changed by their numbers and I have not enjoyed revisiting many places for that reason.
I’m fortunate to not have worries about income and spending, and what I do have is time. Time to pursue life-long interests and develop new ones – and they happen not to entail a lot of spending. The life-long friends who shared my interests (and experiences) are almost all departed; and I don’t think I will develop replacements for those friendships – another lapsed reason for spending on travel.
There are also few other spending requirements – I’ve accumulated more than enough ‘stuff’ and, if anything, I need to discard, not buy more. So the economy will probably have to manage without much of a spending contribution from me – at least, the younger generation seems to be taking up the slack.

June 16, 2024

Well said Doug!

June 17, 2024

Nailed it Doug.
I feel the same way and fortunately managed to travel (off season, not pre-planned & away from tourist hotspots) prior to retiring.
I love gardening, I have stropped consuming (hate shopping and have discovered the wonderful 'op shop') and I am happy if I don't see anyone for days. I have close friends and we catch up for lunch about once a month.
I am self funded and I am probably one of those 'under-spenders' because I don't have a guaranteed income.
I would prefer to pay tax on my income and receive a guaranteed aged pension with all the perks. A 'Universal' aged pension would solve so many problems ..... reduce red tape & bureaucracy, eliminate the need for Centrelink services in many cases, provide peace of mind for many retirees and save the Government a heap of money in the process.
Chance of a Universal Pension ..... I would speculate nil!

June 18, 2024

You also nailed it Sally. Especially regarding a 'Universal' aged pension

June 17, 2024

You've got a universal pension system.Quite a few people get the full "universal " pension payment.

Have a look around around the world

Canadian ( CPP ) annual C$ 16,300.

USA social security average US 1900 monthly.

UK £221 per week,after 35 years contributions.
They all love it .Live in 5 bedroom mansions,pool and sauna in the back garden.The 6 monthly service on the Rolls Royce is becoming expensive,after all there is a cost of living crisis

Do you think they complain just as long and loud as people here,hand out and complaining the govt should give me more money,and it should all be tax free. Sod society,it's all about ME!
The rubbish on sites there Can we not have the Australian system,you can have as much as you want,all tax free

Can we not have Australian mortgages,you can claim the interest on your mortgage as a tax deduction.

June 17, 2024

DougC I agree completely. Our parents lived through WW2 and their parents WW1. We abhor waste, in particular money, though happy to spend large amounts on worthwhile causes e.g. children's education, decent house, renovations (all investments in their own way).Taxis, eating out, cheap self-drive holidays were rare treats. Paying off mortgages was done as quickly as possible and things were only bought when you had funds in your pocket or bank to pay for them.No credit cards or Afterpay.We aimed to save 10% of income.There was of course no superannuation.The age pension was thought to be for the poor. So naturally we are now comfortably off and our spending/saving habits are baked in.

June 14, 2024

"still think a vacation is out of the question":

Cliff Richard 'Summer Holiday':

. We're all goin' on a summer holiday
. No more workin' for a week or two
. Fun and laughter on our summer holiday
. No more worries for me or you

. We're goin' where the sun shines brightly
. We're goin' where the sea is blue
. We've seen it in the movies
. Let's see if it's true

We retirees have been, many times, long ago, are now on perpetual holiday enjoying the superior comfort of our luxurious homes and vicarious excursions into the wilds through the eyes and ears growing on the internet. Much nicer, and cheaper, than elbowing through the post jet-set tourist hoards. With the added stay at home pleasure of counting our money.

June 14, 2024

"should keep a consistent income in[to and during] retirement, and overall consumption should not change":

Resulting in obesity, reduced longevity and increased superfluous savings.

June 14, 2024

"people with an annuity":

The risks are less visible and often less than risk visibility and actual for those without an annuity.
And annuity returns are often less.

Too difficult for some to compute, so they take the easily understandable route of annuities.

Robert Bye
June 13, 2024

Samantha, an issue that you have not covered is that the lifetime cap is triggered as soon as you roll-over any funds from accumulation to pension phase. Assuming retirees are at or over the lifetime cap in accumulation phase and have other income from savings, shares or rental property etc, they may try to live on a lower income so as to (hopefully) get a higher transfer cap. Retirees are extremely concerned about poorly controlled inflation. Given governments poor attempt to control inflation, they could consider not taxing inflation by allowing a deduction for inflation on interest income. A larger annual increase of the lifetime transfer cap would also help.

Boyd Craig
June 13, 2024

Thank you, Samantha, for the interesting article. A major problem that stops many retirees spending more freely is the uncertainty around future cash flow if one member of a couple continues to incur the usual costs of running a home while the partner goes into a nursing home.

June 13, 2024

Agree, you could be up for huge sums to enter a nursing home (prefer the certainty of paying up front). This would leave the one left at home potentially with a massive income and lifestyle drop, coming at a time when they are finally free to travel etc once they don't have to worry so much about their partners needs.

June 17, 2024

You are right there Boyd. Especially re the nursing home issue.

Rob W
June 13, 2024

I understand your premise however I think much of the problem comes from people not understanding the power of (rising) dividend income in their asset mix at retirement. ie. so many people have a far too risk averse asset allocation and that is the problem.
My wife and I retired 9 years ago (at age 52) and have relied entirely on dividend income since then (even now I'm drawing an income stream from SMSF it is entirely dividend backed). We have been 90% invested in shares and LICs for 15 years and we have been spending without consideration for "running out of money". Even despite spending in this manner, our overall portfolio continues to increase (over time and even throughout GFC, pandemics, etc.).
I've never seen or met Peter Thornhill, however when I read his articles I just nod my head and agree. The risk averse financial planning industry and large super funds have a lot to answer for regarding the "don't run of money" issues many face in my view.

Robert Bye
June 13, 2024

Rob, you situation is based entirely on the size of your investments, therefore you total dividend income. Some retirees simply won't have enough dividend income and will be "eating" capital during an inflationary period.

June 13, 2024

Rob W - not sure where you are based but Peter T is currently doing a round of day-long seminars, always fun to hear his somewhat unique way of presenting ! For example he's in Melbourne this Sunday ......


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