Retirement spending decisions are never easy. Even if retirees know how much they can spend in retirement, many still struggle to manage their retirement income. These retirees tend to fall into two camps: those that spend too little of their retirement savings and never enjoy the fruit of their labor, and those that spend too much too quickly and risk running out of money.

So, why do we fall prey to these mistakes? In short: behavioral biases.

Research has examined cases of both over- and underspending and uncovered a few biases that could be at play. Here, we explore some of the potential explanations for these tendencies.

Note that individuals are unique in terms of the biases that they’re subject to and how they manifest, which is why so many different biases can take shape in so many different ways.

Biases that make us spend, spend, spend

Some investors have trouble with self-control and allow immediate spending wants to win out over long-term spending needs, thus resulting in overspending in retirement.

One bias at play here may be temporal discounting, which leads us to discount future needs in place of present-day needs and desires. Some research suggests this is because we feel psychologically disconnected from our future selves—to the point that our future selves can be seen as complete strangers. When this happens, many retirees may feel no need to take care of their future selves and choose to meet the needs of their current selves instead.

The availability heuristic—our tendency to use information that comes to mind quickly and easily—can be another reason for retirement income overspending. Consider the case of learning that someone has died soon after they retired. Not only did this person not get to enjoy their golden years, but they also lost out on spending their hard-earned money. Some investors may have this tragic story in mind when considering their own life savings and, even though the average retirement time span only continues to increase, may want to spend now “while they can.”

With these biases in mind, here are a couple of strategies retirees can use to curb their spending:

  • Use visualizations to sharpen your idea of the future and feel closer to your future self. For example, some research points to the usefulness of people seeing an age-progressed future of their older selves using technology, such as an age-progression app. In the research, those who saw this future version of themselves were more likely to forego immediate rewards to achieve future rewards.
  • Challenge yourself to visualize your future life in detail on pen and paper. For example, what does a day in your life look like at age 70, 80, 90, and even 100? Push yourself to fill in the details for each age. Where will you be living? How will you spend your afternoons? Where will you go throughout the day? And, lastly, what can you do now to make sure that your future vision comes true?

Biases that make us hit the brakes

In addition to the overspenders, there are the investors who seem to hoard their savings.

These investors may be victims of their own fear and caught in a never-ending loop of “what if?” What if they outlive their assets? What if the markets go haywire and they lose money? What if they are confronted with a big expense somewhere down the line?

These worries are related to longevity risk, or the fear that an investor may outlive their assets. Although there is merit in considering these questions, many investors let their biases cloud their judgment when doing so.

For example, pessimism bias may prompt some retirees to overestimate the likelihood of negative events like extreme market losses. Similarly, zero-risk bias—our tendency to favor options that offer the most certainty—may also play a role. To retirees, the best way to ensure that they don’t outlive their assets is to avoid spending any.

Zero-risk bias is closely related to loss aversion—where losses hurt twice as much as equivalent gains give pleasure. Loss aversion can impact investors’ decumulation decisions in multiple ways: It may prompt retirees to invest too conservatively, avoid spending down assets, or even avoid the upfront cost of an annuity.

In some ways, retirement kicks loss aversion into high gear because retirees are faced with the realization that they are on a fixed income for the rest of their lives. Before retirement, future labor income was uncertain, and this uncertainty provided some level of flexibility. If one overspends while working, they can work more hours next month or wait until their end-of-year bonus to start building back up their savings. But in retirement, there is no wiggle room, and it’s more of a sure thing that overspending will result in a sure loss in future consumption. In a world where that future you is 85 years old and unable to work, that future loss looms much larger than an extra extravagance today.

The draw to underspend in retirement is strong for some, but retirees can still nudge themselves into responsibly spending their hard-earned savings.

Some research suggests that guaranteed income sources can give people the “permission to spend” that they need in retirement. This mindset shift may occur for multiple reasons: The retiree is no longer worried about running out of money; since the money is already in an annuity, it may feel like someone else’s money they are spending; or since retirees pay for annuities in a lump sum upfront, they consider the money already spent and want to make sure they get their full money’s worth (as Jane Austen wrote, “People always live forever when there is an annuity to be paid them.”).

Since many retirees are afraid to make the complete jump into an annuity, they can instead try to emulate some of these benefits.

  • Face the fear head-on. For example, retirees may be able to use software or work with a financial advisor to quantify how much they can spend monthly in retirement without running out of money, even with setting aside funds for any surprise expenses. James Clear, the author of Atomic Habits, sums this tactic up perfectly: “Working on a problem reduces the fear of it.”
  • Ask a trusted loved one or a financial adviser to act as the paycheck provider, sending a set amount on a biweekly basis. This process may mimic the automated payments one gets from an annuity or a regular paycheck.
  • Reconnect to your life values. Trigger the “we must spend our income to get our money’s worth” emotion with a simple reminder of why you need to spend money—whether it’s to buy a condo near your grandchildren or to book that trip to Italy to taste authentic Italian cuisine. This can be the nudge you need to make sure you make the most of your retirement.

Wrapping it up

Retirement spending decisions are fraught with behavioral biases, but not all hope is lost.

There are research-backed fraught find the sweet spot in retirement spending. Also, as a record number of people transition into retirement, industry professionals are looking to address retirement income needs via new products. In other words: Who knows what the future will bring?

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