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. They are not struggling. They are scared, and that fear is 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 both documented what is increasingly called the “underspending paradox.” The term describes a meaningful share of retirees who, despite holding substantial portfolios, spend far less than their assets can support and often leave wealth almost entirely intact throughout retirement.
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 the most conservative financial planner would recommend. For context, Morningstar’s 2026 analysis puts the safe starting withdrawal rate at 3.9% for a 90% probability of funds lasting 30 years. 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 $58,000, they are leaving $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, with higher outlays in the early “go-go” years, a dip in the middle “slow-go” years, and a modest uptick in the final years driven by healthcare costs.
More recently, a 2025 study by Blanchett and Michael Finke found that roughly 80% of lifetime income is spent in retirement, while only about half of wage income and capital income gets spent. That asymmetry helps explain why retirees with portfolio wealth, rather than pension income, are the most prone to chronic underspending. An EBRI survey from 2024 put a sharper point on the problem: 38% of retirees described themselves as having a “savings mindset,” and only 11% identified as spenders.
Longevity uncertainty amplifies the anxiety further. 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 adds 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 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 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, not merely assumed.
Generate Yield with Strategic Options
Retirees can shift from an asset-depletion mindset to an income-generation mindset through conservative quantitative 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 turns market volatility into a source of cash flow, creating 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. Data from JPMorgan’s 2025 Guide to Retirement underscores the point: retirees with 60% to 80% of their wealth in guaranteed income spend 42% more annually than those with less than 20% in guaranteed income. 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 an IRA to a qualified charity. The 2026 annual limit is $111,000 per individual, or $222,000 for a married couple. These distributions can satisfy required minimum distribution obligations without the amount appearing in adjusted gross income, which reduces Medicare surcharges and can limit taxes on 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 is $19,000 per recipient, or $38,000 for a married couple using gift-splitting. That means a couple can transfer $38,000 per child or grandchild each year without touching their lifetime exemption. Under the One Big Beautiful Bill Act, the lifetime estate and gift tax exemption rose to $15 million per individual in 2026, up from $13.99 million in 2025, and the increase carries no sunset provision. 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 update adds Morningstar’s 2026 safe starting withdrawal rate of 3.9%, incorporates findings from Blanchett and Finke’s 2025 study showing that roughly 80% of guaranteed lifetime income gets spent versus about half of capital income, and includes EBRI’s 2024 survey finding that 38% of retirees describe themselves as having a “savings mindset.” It also adds JPMorgan data showing retirees with 60% to 80% guaranteed income spend 42% more annually than those relying mainly on portfolio withdrawals, and notes that the One Big Beautiful Bill Act made the $15 million lifetime estate exemption permanent with no sunset provision.
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