Somewhere in America, there is a couple in their late sixties with $2.4 million in savings, no debt, two Social Security checks, and a weekly grocery budget they have not adjusted since 2019. This couple isn’t struggling, but they are scared, and that fear is costing them nearly a million dollars in lived experience.
The thing is, this scenario isn’t just a hypothetical, as behavioral finance researchers, including Wade Pfau at Pfau Wealth Management and David Blanchett at Morningstar, have both documented what is increasingly called the “underspending paradox.” This term means that a meaningful share of retirees with substantial portfolios spend far less than their assets can support, often leaving wealth almost entirely intact across retirement.
According to research from big names in finance like Morningstar and T.Rowe Price, roughly 25% of retirees with $1 million or more will spend less than 3% annually. This is well below the threshold that any numbers that even financial planners would find to be conservative. For a couple with $2.4 million, pulling out 4% annually would generate around $96,000 per year in annual income.
If this couple is spending $58,000, they are leaving $38,000 per year on the table. Now, multiply this number across a 22-year retirement, and this gap represents roughly $880,000 in foregone experiences, travel, family support, and personal enjoyment, while the portfolio continues compounding toward an estate neither spouse may live to fully appreciate.
Why This Happens: The Spending Smile
The psychological drivers 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. This is often complicated by the “spending smile” phenomenon, where retirees spend heavily in early “go-go” years, dip in mid-retirement, and face rising healthcare costs later. Longevity uncertainty amplifies this as a couple, both aged 68, faces a meaningful probability that at least one spouse lives into their nineties, and no spreadsheet fully quiets the fear of running out.
Healthcare costs add another layer, with long-term care expenses difficult to predict and potentially catastrophic in the worst-case scenarios. The result is a retiree who accumulates 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 Fund 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, not assumed.
Generate Yield with Strategic Options
Retirees can shift from an asset-depletion mindset to an income-generation mindset by utilizing conservative quantitative strategies. Implementing 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 liquidation of core principal. This approach leverages market volatility to create a “spending floor” that psychologically bypasses the fear of a shrinking balance.
Use Partial Annualization 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 floor is no longer at risk, the remaining portfolio can be spent more freely. Pfau’s research consistently shows that annuitizing a baseline income layer reduces spending anxiety more effectively than projections and probability analyses alone.
Direct IRA Dollars to Charity Through QCDs
Qualified charitable distributions allow retirees aged 70 and a half or older to direct up to $111,000 annually from an IRA directly to a qualified charity. This updated 2026 limit allows distributions to satisfy minimum distribution requirements without the income hitting adjusted gross income, reducing Medicare surcharges and potential tax on Social Security benefits. For retirees who feel more comfortable giving than spending, QCDs create a productive outlet for capital that would otherwise sit accumulating.
Make Lifetime Gifts to Family Now
The 2026 annual gift exclusion allows each spouse to give $19,000 per recipient, meaning a couple can transfer $38,000 per child or grandchild annually without affecting their lifetime exemption. For a retiree motivated by family legacy, it is often more rewarding to witness the impact of these gifts at 70 rather than leaving an inheritance at 90.
The Real Cost of Waiting
The underspending trap is not a failure of financial planning, but 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 the outcome was the goal, or whether it happened by default while a better retirement went unlived.
Editor’s Note: This article has been updated for 2026 to reflect the new Qualified Charitable Distribution (QCD) limit of $111,000 and the current annual gift tax exclusion. New sections were added to introduce the “Spending Smile” research by David Blanchett and a strategic section on generating portfolio yield through quantitative options strategies to address the consumption gap.
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