The Spending Paralysis Trap: Why Retirees With $2.4 Million Live Like They Have $400,000

Somewhere in America, a couple in their late sixties holds $2.4 million in savings, carries no debt, cashes two Social Security checks each month, and has not adjusted a weekly grocery budget since 2019. They are not struggling. They are scared, and that fear is quietly costing them nearly a million dollars in lived experience.

This scenario is far from hypothetical. Behavioral finance researchers, including Wade Pfau of Pfau Wealth Management and David Blanchett, formerly head of retirement research at Morningstar and now at PGIM DC Solutions, have documented what is increasingly called the “underspending paradox.” The term describes a substantial share of retirees who, despite holding large portfolios, spend far less than their assets can comfortably support and often leave wealth nearly intact from the first year of retirement to the last.

Research from Morningstar and T. Rowe Price finds that roughly 25% of retirees with $1 million or more spend less than 3% of their portfolio annually, well below what even conservative financial planners would recommend. Morningstar’s 2025 “State of Retirement Income” report, published in December 2025, puts the safe starting withdrawal rate at 3.9% for retirees seeking a consistent level of inflation-adjusted spending over a 30-year period, at a 90% probability of not running out of funds. That rate, which applies specifically to portfolios with 30% to 50% in equities, ticked up from 3.7% the prior year on improved capital markets assumptions. With more flexible strategies, including delayed Social Security claiming and a “guardrails” approach, the report notes starting withdrawals could rise as high as 5.7%. For a couple with $2.4 million, withdrawing 4% annually would generate around $96,000 per year in retirement income.

If that couple is spending only $58,000, they leave $38,000 per year untouched. Stretched across a 22-year retirement, that gap represents roughly $880,000 in foregone travel, family support, and personal enjoyment, while the portfolio compounds toward an estate neither spouse may fully live to appreciate.

Why This Happens: The Spending Smile

The psychological drivers behind underspending are well understood, even when they are hard to overcome. Loss aversion makes drawing down a portfolio feel threatening, even when the math says otherwise. Complicating matters is the “retirement spending smile” phenomenon, first documented by Blanchett in his Morningstar paper “Estimating the True Cost of Retirement.” His research found that real, inflation-adjusted spending declines roughly 1% to 2% per year through most of retirement. Outlays are highest in the early “go-go” years, dip through the middle “slow-go” years, and then tick back up in the final stage as healthcare costs rise.

A 2025 study by Blanchett and Michael Finke, published in the Financial Planning Review, deepened this picture considerably. Using data from the Health and Retirement Study, the researchers found that roughly 80% of lifetime income from Social Security, pensions, and annuities gets spent, while only about half of wage income, capital income, and portfolio savings gets consumed. The study also revealed that married 65-year-olds with meaningful assets withdraw just 2.1% per year from their retirement accounts. Single retirees of the same age are even more conservative, withdrawing just 1.9%. Both figures are less than half the commonly cited 4% guideline. That asymmetry helps explain why retirees who rely on portfolio wealth rather than pension income are the most prone to chronic underspending.

Survey data reinforces the picture. An EBRI study from 2024 asked approximately 3,600 retirees aged 62 to 75 to rate their consumption philosophy on a scale from 1 (savings mindset) to 10 (spending mindset). About 38% rated themselves a 1, 2, or 3, claiming a savings orientation. Only 11% rated themselves an 8, 9, or 10, claiming a spending orientation. The remaining half described themselves as neutral.

Longevity uncertainty amplifies the anxiety. A couple both aged 68 faces a meaningful probability that at least one spouse lives into their nineties, and no spreadsheet fully quiets that fear. Healthcare costs add another layer of unpredictability, with long-term care expenses difficult to forecast and potentially catastrophic in worst-case scenarios. The cumulative result is a retiree who accumulated with discipline for four decades and then treats the portfolio as untouchable even after the accumulation phase has ended.

Five Ways to Break the Pattern

Build a Dedicated Fun Budget

The most practical first step is creating a discretionary budget that is mentally separated from essential expenses. Research on mental accounting shows that retirees who explicitly earmark a fun budget of $15,000 to $25,000 annually spend it more freely than those who draw from a single undifferentiated pool. Permission to spend has to be built into the structure rather than merely assumed.

Generate Yield with Strategic Options

Retirees can shift from an asset-depletion mindset to an income-generation mindset through conservative, rules-based strategies. A covered call or cash-secured put strategy on a portion of a $2.4 million portfolio can generate additional yield that covers discretionary spending goals without requiring the sale of core holdings. This approach converts market volatility into a source of cash flow and creates a psychological spending floor that bypasses the fear of a shrinking balance.

Use Partial Annuitization to Create a Spending Floor

Converting 20% to 30% of the portfolio into a single premium immediate annuity creates guaranteed lifetime income that cannot be outlived. Because that guaranteed floor is no longer at risk, the remaining portfolio can be spent more freely. J.P. Morgan’s 2026 Guide to Retirement underscores the point: households with higher guaranteed income spend up to 44% more in retirement than those relying primarily on portfolio withdrawals. That same guide highlights how delayed Social Security claiming amplifies this effect, since most Americans retire at 62 despite planning to retire at 65, and waiting until 70 can boost monthly benefits by 24%. Pfau’s research consistently shows that annuitizing a baseline income layer reduces spending anxiety more effectively than probability analyses and Monte Carlo projections alone.

Direct IRA Dollars to Charity Through QCDs

Qualified charitable distributions allow retirees aged 70 and a half or older to send funds directly from a traditional IRA to a qualified 501(c)(3) charity. The 2026 annual limit is $111,000 per individual, up from $108,000 in 2025, according to IRS Notice 2025-67. Each spouse in a married couple can contribute up to that full amount from their own IRA, for a combined total of $222,000. These distributions satisfy required minimum distribution obligations without the amount appearing in adjusted gross income, which reduces Medicare surcharges and can limit the taxation of Social Security benefits. For retirees who feel more comfortable giving than spending, QCDs create a productive outlet for capital that would otherwise continue accumulating.

Make Lifetime Gifts to Family Now

The 2026 annual gift tax exclusion remains at $19,000 per recipient, the same as in 2025, or $38,000 for a married couple using gift-splitting. A couple can transfer $38,000 per child or grandchild each year without touching their lifetime exemption. The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently set the lifetime estate and gift tax exemption at $15 million per individual, effective January 1, 2026 and indexed for inflation going forward with no sunset provision. For context, that exemption was $13.99 million per individual in 2025 and had been scheduled to drop sharply at year-end absent new legislation. For a retiree motivated by family legacy, witnessing the impact of these gifts at 70 is often far more rewarding than leaving an inheritance at 90.

The Real Cost of Waiting

The underspending trap is not a failure of financial planning. It is a failure of permission, and the numbers make the cost concrete. A couple spending $58,000 per year on a $2.4 million portfolio is effectively choosing to bequeath wealth rather than live on it, often without consciously making that choice. The portfolio may well reach $4 million by the time the survivor passes. The question worth sitting with is whether that outcome was the goal, or whether it happened by default while a better retirement went unlived.

Editor’s note: This revision updates the Morningstar safe withdrawal rate context to note that the 3.9% figure, published in December 2025 for those retiring in 2026, rose from 3.7% in the prior year and that more flexible strategies can lift starting withdrawals to 5.7%. It also adds the finding from the Blanchett-Finke study that single 65-year-old retirees withdraw just 1.9% annually, expands the EBRI 2024 survey context with the full scale description and sample size, and confirms the 2026 QCD limit of $111,000 per individual per IRS Notice 2025-67, along with the $222,000 combined ceiling for married couples.

Contact [email protected] for any questions or corrections.