Happy romantic senior couple hugging and enjoying retirement outside.

3 behavioral factors can affect retirement spending

Find tips to overcome 3 factors that can get in the way of living out your ideal retirement.
10 minute read
January 31, 2022
Living in retirement
Retirement income

You've worked hard to build your retirement nest egg and now the time has come or is approaching for you to begin the "decumulation phase"—taking withdrawals in retirement to live off your accumulated assets.

This can be a very exciting time in your life where you get to live out your retirement dreams. But you may also be experiencing a wide range of emotions that could affect your spending strategy and your overall well-being. If so, you're not alone. You may find yourself asking, "Did I save enough to last throughout my retirement? Can I afford that family vacation or investment property? Will I have enough to cover health care?" While not everyone is in the fortunate position to retire comfortably, these real concerns can make it uncomfortable for even the most financially secure investors to enjoy spending their money.

So what's really holding back prepared retirees from enjoying the fruits of their labor?

3 factors that can affect spending

1. Self-control

When it comes to saving, investors tend to take either a shortsighted or a farsighted approach.

Shortsighted investors generally give more weight to spending and overindulging in the present. As a result, they fail to save enough for retirement. On the other hand, farsighted investors exercise a great deal of self-control when it comes to saving, and they tend to insufficiently indulge themselves. Their discipline generally leaves them more than prepared for retirement. However, unlike their myopic counterparts who may regret their indulgences later, farsighted investors tend to feel a sense of regret for exercising too much self-control and not spending more on life's pleasures.

Transitioning to the decumulation phase can be a tricky time, even if you're in a position where you can afford to spend more than you are. After all, the very personality features that led you to diligently save for more than 40 years don't just go away with the flip of a switch when it's time to draw down your assets.

To help my clients shift from a saving to a spending mindset, I take time to understand their concerns and offer customized solutions to meet their needs.

For example, most clients don't just go from making few to no withdrawals to buying that Lamborghini they've always dreamed of. I work with them to illustrate how splurging on a particular item will affect their financial future. And often times, we find that there's no impact to their long-term financial success. Our conversations also consider the following questions:

Why did you save for retirement in the first place and what do you truly value in life? Maybe comfort, security, personal growth, and quality time with loved ones are important to you. Remember, you worked hard to save for your unique goals. Spending in retirement can help you realize them.

How will you feel in the future if you don't live in the moment or enjoy spending what you can afford to now? When the idea of spending induces anxiety, focusing on how you'll feel later may make your decision to go on that family trip, for example, a little easier. This is especially true if building lasting family memories in your retirement is one of the reasons you saved so hard in the first place.

2. Loss aversion

It's natural to feel good about accumulating money and bad about losing it. The principles behind loss aversion explain why the negative feelings of losing money are greater than the positive feelings of gaining an equivalent amount of money.

Loss aversion also implies that it's less upsetting to incur losses all at once than to incur them across multiple occasions. Simply put, it hurts less to lose $100 at once, than to lose $25 on 4 separate occasions. For these reasons, coupled with the personal attachment investors have toward their savings, it shouldn't come as a surprise that some people experience feelings of constant loss when making retirement withdrawals.

Here are a couple of strategies I use when working with my clients to help reduce those feelings of loss:

  • Change your mindset. Consider your monthly or annual withdrawals as paychecks to yourself instead of money you're taking away from your savings.
  • Consider taking larger distributions less frequently. This is a simple tactic that works for many of my clients. Instead of taking smaller monthly withdrawals, they draw down larger amounts on a quarterly, biannual, or annual basis and set it aside in a separate spending account.

3. Scarcity and opportunity costs

Spending from what seems to be a fixed pool of nonreplenishing resources can elicit feelings of stress and make you worry about "opportunity costs"—other ways you could be using your money or the trade-off of spending those resources today. It's when you find yourself saying, "If I spend $10,000 on this, I won't have it to spend on something else I might want or need down the line."

Naturally, you'd expect this to be more of a concern for investors with insufficient savings. But as mentioned above, farsighted investors with sufficient funds can be impacted too, as their natural tendency is to focus on the future and exercise too much self-control.

Some of my clients who grew up during the Great Depression know what it's like to have an uncertain future or worry about where their next meal will come from. Their experiences have reinforced the value of the dollar and led them to work hard and make sacrifices to build a secure retirement. They grew up living very frugally and some feel they don't need much beyond the necessities. As a result, they sometimes find it difficult to indulge. For example, one of my clients wanted to take her family on vacation to build memories but was afraid she might need the money for future health care costs.

We overcame these concerns by employing some of the strategies mentioned above. We revisited why she invested in the first place, discussed how she might feel later if she didn't take the trip, and reviewed the impact to her financial plan—taking 10,000 market scenarios into account. At the end of the day, she just needed to be reminded of her goals and to find peace of mind by seeing the bottom line—whether she could afford to take this trip without jeopardizing her other long-term goals.

Being focused on the long term and taking a disciplined approach to investing are part of our core investing principles. But if you're in a good financial position, there comes a time when it's okay to live out the retirement you planned for.

Memories are priceless. That's why one of the most rewarding parts of my job is watching my clients gain the clarity they need to take that dream vacation or pursue another retirement goal.

Want more on retirement withdrawal strategies?

Want an investment partner to guide you through retirement spending decisions?

Working with Vanguard Personal Advisor gives you anytime access to advisors who are fiduciaries—always acting in your best interests. We get to know your needs, come up with strategies to make your retirement money last, and help you live the retirement you planned for.

Most Viewed

Ready to invest? See how to open an account
Start with this step-by-step guide to opening a personal investment account, such as a general investing brokerage account or an IRA.
Backdoor Roth IRA What it is and how to set it up
If you are a high-income earner, a Backdoor Roth IRA may be a good retirement investment option for you. Learn what it is and how to set up this type of retirement plan.
Who owns Vanguard?
Who owns Vanguard? Learn why we're proud to be the only investor-owned investment management company and how we focus on putting investor needs first.
Are bonds a good investment right now?
Learn how high-quality bonds can play a valuable role in your portfolio in a high-yield environment.
Top 6 tips: Your year-end financial checklist
Discover our new international fund

All investing is subject to risk, including the possible loss of the money you invest.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.

Research our investment professionals with FINRA's BrokerCheck.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and Certified Financial Planner™ in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.