Retirees Are Making a Costly Money Mistake, and It Is Not Spending Too Much

For years, retirement planning has focused on a single concern: avoiding the risk of running out of money. But financial advisers and retirement researchers are increasingly warning that many retirees face a different problem. They are spending too little.

Research from the Employee Benefit Research Institute (EBRI) suggests a significant number of retirees continue to preserve most of their retirement savings well into old age, often at the expense of experiences they could comfortably afford. The trend highlights a growing challenge for older Americans: finding the balance between financial security and enjoying the retirement they spent decades preparing for.

Many Retirees Continue to Preserve Their Savings

According to recent EBRI research, about one-third of retirees still had 100% or more of their original retirement savings remaining by their mid-80s. Craig Copeland, Director of Wealth Benefits Research at EBRI, said the figures indicate many retirees may be spending more conservatively than necessary.

'When you see so many people into their 80s still at 100%, you see people who are being way too conservative with their spending,' Copeland told CNBC.

The study also found the opposite problem exists. Around one-fifth of retirees who entered retirement with more than $500,000 had less than 20% of their assets remaining by their mid-80s.

Copeland described retirement spending decisions as one of the most difficult financial challenges retirees face. 'This will be the foremost challenge in retirement: figuring out how to maximise retirement but still have a buffer at the end,' he said.

Why Spending Too Little Can Be a Problem

The risks of overspending are well understood. Retirees who exhaust their savings may struggle to cover living costs later in life. The risks of underspending are less obvious. Marianela Collado, a Certified Financial Planner and Certified Public Accountant based in Florida, said excessive caution can prevent retirees from making the most of their later years.

'It represents a life not lived, the vacations you didn't take because you were afraid you were going to run out of money,' Collado told CNBC. Financial advisers say many retirees find it difficult to shift from decades of saving money to gradually spending it. Copeland noted that people often become uncomfortable watching account balances decline, even when those withdrawals are part of a carefully planned retirement strategy.

A Psychological Shift Many People Struggle to Make

According to Copeland, retirees today have also benefited from years of strong market performance following the 2008 financial crisis. Many have seen their investments grow throughout retirement, making them even more hesitant to draw down their savings.

Zach Teutsch, founder of Values Added Financial and a member of CNBC's Financial Advisor Council, uses a sailing analogy when discussing the issue with clients. He compares running out of money to rocks on one side of a channel and missing life experiences to rocks on the other. 'Eventually, if you sail too far the other way, you end up ditching your boat on the shoals of regret,' Teutsch told CNBC.

Teutsch said he hopes retirees do not look back and realise they sacrificed family time, travel opportunities or charitable giving because they were overly concerned about preserving wealth.

How Much Can Retirees Spend?

Financial planners often use the 4% rule as a starting point when estimating retirement withdrawals. Under the approach, retirees withdraw 4% of their portfolio in the first year of retirement and increase that amount annually to account for inflation. For example, a retiree with a $1 million portfolio would withdraw $40,000 during the first year. However, advisers caution that the rule is only a guideline and may encourage overly conservative spending in some cases.

Teutsch supports a more flexible approach known as dynamic spending, where withdrawals rise or fall depending on investment performance and personal circumstances. This strategy can help retirees enjoy more of their savings during strong market years while preserving capital during downturns.

Finding the Right Balance

Financial advisers stress that retirement savings are intended to support a meaningful life, not simply remain untouched. Many retirees are healthiest and most active during the early years of retirement, making that period particularly valuable for travel, hobbies and time with family.

While preserving financial security remains important, advisers say excessive caution can carry its own cost. For some retirees, the greatest risk may not be running out of money. It may be reaching the end of retirement with substantial savings and wondering whether they could have lived more fully.