Retirement ‘Underspending’ Is a Hidden Risk, Advisors Warn: Here’s How to Avoid Living with Regret

lasca mosca shosca california usa

retirement risk underspending

Most retirees lose sleep worrying about one big financial danger: running out of money too soon. But financial experts say there is another, often overlooked threat that can be just as harmful to your happiness—the risk of underspending.

According to a recent study by the Employee Benefit Research Institute (EBRI), about a third of retirees still have 100% or more of their initial savings remaining by their mid-80s. While that might sound like a success, advisors warn it signals a life of missed opportunities.

“It represents a life not lived—the vacations you didn’t take because you were afraid you were going to run out of money.”
— Marianela Collado, CFP and CPA

Here is why being too conservative with your nest egg is dangerous, and how to find the right balance between enjoying today and saving for tomorrow.

The Psychology of Underspending

For many retirees, the shift from saving to spending feels unnatural. After decades of watching their net worth grow, the idea of drawing down assets creates anxiety.

Zach Teutsch, a member of CNBC’s Financial Advisor Council, uses a sailing analogy to explain the dilemma. He says retirees are navigating a channel with rocks on both sides. One side represents the risk of overspending (running out of cash). The other side represents the risk of underspending (missing out on experiences).

“Eventually, if you sail too far the other way, you end up ditching your boat on the shoals of regret,” Teutsch said. “I hope people don’t look back and say, ‘I have more than I need, and it means I didn’t need to work nights and weekends.’”

Learning to spend wisely is a skill. If you are still struggling with daily cash flow, review these 20 Smart Ways to Save Money Fast to free up funds for experiences, not just bills.

Why the 4% Rule Might Be Too Conservative

To combat underspending, many advisors point to the classic 4% rule. This rule suggests retirees withdraw 4% of their portfolio in the first year of retirement and adjust that amount for inflation each subsequent year.

However, because the 4% rule uses very conservative assumptions to protect against market crashes, it can actually lead to underspending. A retiree with a $1 million portfolio would only withdraw $40,000 in year one, even if they are healthy and eager to travel.

Before you decide on a withdrawal strategy, ensure your savings habits are solid. Learn How to Save Money from Salary effectively, so your retirement contributions are maximized during your working years.

A Better Way: Dynamic Spending

Instead of a static 4% withdrawal, advisors recommend a dynamic spending approach. This allows your spending to flex with the stock market.

In good years: You might withdraw 7% to fund that dream vacation or home renovation.
In bad years: You tighten the belt to 2.5% to preserve capital.

This method reduces “sequence of returns risk”—the danger of selling stocks when the market is down. It also acknowledges that retirement spending is U-shaped: high in early “go-go” years, lower during slow years, and high again later due to healthcare costs.

If you are currently living on a low income and trying to save for retirement, building this flexibility is tough. Check out this guide on How to Save Money Fast on a Low Income to start building your foundation today.

Don’t Forget Required Minimum Distributions (RMDs)

While you want to avoid underspending, you also cannot ignore the tax man. Retirees must ensure they are withdrawing at least enough to cover any Required Minimum Distributions (RMDs) from their traditional retirement accounts. Failing to take an RMD results in a hefty 25% penalty from the IRS.

Planning for RMDs is part of a larger financial discipline. If you are still early in your journey, adopting the Best Daily Saving Habits now can ensure a smoother transition into retirement later.

How to Spend Without Guilt

Financial advisors agree that you shouldn’t be afraid to enjoy the money you worked decades to save. If your financial plan shows you have a buffer, here is how to spend wisely:

Prioritize Experiences: Spend on travel, hobbies, or dining while you are mobile and healthy.
Give with a Warm Hand: Donate to charities or help your children buy a house. You get emotional enjoyment from giving now rather than leaving a cold inheritance later.
Consider Side Work: If a down market makes you nervous, consider “dynamic earning.” A few hours of consulting per week can supplement your income so you don’t have to sell stocks at a loss.

Building wealth requires strict rules, but spending it requires flexibility. For those still in the accumulation phase, following the Best Salary Saving Rule to Keep More of What You Earn is the first step toward a stress-free retirement.

Action Plan for Today

Retirement underspending is a “good problem” to have, but it is a problem nonetheless. To ensure you aren’t dying with a massive unspent fortune while living with regret, take these steps:

Run a Monte Carlo simulation with a financial planner to see the odds of you running out of money. You may find you can spend 20% more than you think.
Front-load your “go-go years.” Take the big trip at age 68, not 78.
Automate your giving. Set up a charitable gift fund to distribute assets annually.

Remember, the goal of retirement isn’t just to die with zero dollars—it is to die with zero regrets. If you are struggling to get to that starting line, revisit the fundamentals. Read this Complete Guide to Saving Money: Personal Finance Tips That Actually Work to ensure your entire financial house is in order.

lasca mosca shosca california usa

The Psychology of Underspending

Why the 4% Rule Might Be Too Conservative

A Better Way: Dynamic Spending

Don’t Forget Required Minimum Distributions (RMDs)

How to Spend Without Guilt

Action Plan for Today

Read Also: More Personal Finance Resources