6 Telltale Signs You’re Being Too Cheap in Retirement

You don’t want your money to outlive you

Donna Fuscaldo,

AARP

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En español

Published April 26, 2022

/ Updated April 24, 2023

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Spending in retirement can be daunting. There are lots of uncertainties and unforeseen risks that may prevent you from splurging. But if you’re being too cheap with your retirement dollars, it defeats the purpose of amassing a nest egg in the first place, even if hunkering down helps you sleep at night.

“It’s very common [for retirees] to respond conservatively” when it comes to spending in retirement, says Rob Williams, managing director of financial planning, retirement income and wealth management at the Schwab Center for Financial Research. “You’ve lost a paycheck; your ability to go back to work has decreased or may not be there; there’s a lot of uncertainties and risk to try to anticipate.”

Medical expenses are a big one. With retirement easily lasting decades, there’s a greater chance you’ll get hit with a pricey medical bill or require long-term care. Housing is another high-dollar consideration. Rents are soaring, and a lack of affordable housing is a real problem for older adults. The prospect of not being able to cover those outlays is scary, which prompts retirees to forgo that vacation, hobby or night out on the town — the very things they’d saved up to do in their postwork years. What they don’t realize is that over time, it adds up and their money ends up outlasting them. That’s fine if there are heirs or a charity these savers want to leave their money to. Otherwise, it may be time to start spending some of those bucks if any of the signs below rings true.

1. You’re healthy

The average 65-year-old retired couple in 2022 is projected to spend $315,000 on health care expenses during retirement, according to Fidelity Investments. That’s not accounting for any unexpected illnesses or long-term care requirements, which can add thousands of dollars to the bill. It’s a big reason retirees are frugal with their money, but if you’re healthy, you don’t have to be a spendthrift.

“A good sign is how you are doing medically,” says Andrew Meadows, senior vice president at Ubiquity Retirement + Savings. “Are you exercising, eating well, doing everything you can to prevent that medical diagnosis?” If you can answer yes, Meadows says you don’t have to be so chintzy when it comes to spending on things dedicated to wellness and keeping you active. The healthier you are, the less you’ll need to spend on medical care and the more money you’ll have for the pursuit of happiness.

2. You don’t have a plan

We spend years mapping out our retirement saving plan, methodically putting money away and making sure it’s invested properly. But once retirement hits, we don’t have a detailed plan on how to spend it. Without a plan, it’s hard to tell how much you should actually be drawing down, Williams says. It can lead to overspending by some and underspending by others.

3. You are following the 4 percent rule too rigidly

There’s a common retirement spending formula in which you draw down 4 percent of your retirement savings during your first year. In the following years, you adjust the amount you withdraw to reflect inflation. That strategy increases the odds you won’t run out of money during 30 years of retirement. But according to Williams, it doesn’t work for everyone and could cause you to leave too much money on the table during your retirement years.

For starters, Williams says, the 4 percent rule assumes spending each year will increase by the rate of inflation and assumes spending is consistent from one year to the next. That tends not to be the case, with expenses changing even annually and throughout the golden years. At the beginning of retirement, you may spend a lot, but as you age, your spending could decrease. “It’s a fine place to start up, but it doesn’t always line up,” Williams points out. “Your spending rate has to be personalized, flexible and updated annually.”

4. You’re holding on to a big house

Many retirees cling to their old lifestyle, holding on to their home because that’s where they raised their children or spent their working years. But keeping that big house can be costly as you age, especially if you have to pay people to maintain it. If you downsized your residence, you could free up more money to live on. “A lot of people say they want to travel when they are older. Maybe you don’t need the two-story house that your family lived in all those years,” Meadows says.

5. You wait too long to tap your retirement account

It’s common for retirees to wait until age 72 to begin drawing from their tax-deferred retirement accounts. That’s the age the government requires you to take minimum distributions, which are taxed as ordinary income. If you wait to draw down until then, you could be burdened with a greater tax bill. Plus, you are older and may not have as much energy or the health to enjoy life as you would during your early retirement years, Williams notes. If that sounds familiar, he suggests considering tapping some retirement money while you can still enjoy it: “Spend some of that money in the go-go years of retirement.”

6. You have too much in savings as you get older

Retirement comes in stages. In the early years spending tends to be higher as retirees pursue hobbies, check off bucket list items and otherwise enjoy their newfound freedom. As they get older, particularly after age 65, the spending starts to slow. A recent Rand Corp. study found real spending for both singles and couples declined 1.7 percent and 2.4 percent respectively after age 65. The spending decline was across the board from the wealthy to those with modest amounts of cash. “In determining retirement income needs, households and the financial planners should not rely on the common assumption that real spending will be constant or even increase, because this is not supported by household-level spending data,” wrote Mark Hurd, director of the Rand Center for the Study of Aging.

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Donna Fuscaldo is a contributing writer and editor focusing on personal finance and health. She has spent over two decades writing and covering news for several national publications including The Wall Street Journal, Forbes, Investopedia and HerMoney.