How underspending (yes, underspending) can ruin retirement

About the only thing rarer than a hybrid solar eclipse is when Americans achieve a consensus.

That said, after three decades of advising, it is as clear as ever to me that the #1 retirement worry of great savers remains the fear of outliving their money.

No shock there.

And yet a common shadow fear of people who have spent a lifetime saving can emerge when a person retires and has become so conditioned to the accumulation of assets that they, first, refuse to allow themselves to enjoy the fruits of their labor, and second, they subscribe to a “set it and forget it” investment doctrine, which inadvertently sets them up for a monster tax bill when required minimum distributions (RMDs) kick-in later.

That’s right. Just as sure as you can spend down your savings too quickly, among shrewd savers, it is nearly as common to retire and underspend and under-respond, and that can simultaneously harm your enjoyment of life and cost you money.

If you’ve saved exceptionally well, but you sense that anxiety about financial scarcity is impacting your life, here is what you could do.

Review your budget and adjust where necessary

Many people who save well for retirement forever travel down a one-way street. That is, they save, and they save, and they save … and yet they don’t do anything else. For instance, they neglect to have the allocations in their retirement accounts analyzed. They don’t have a thorough understanding of how their cash inflows and outflows will change in the future. And, most importantly, they don’t take the initiative to understand how they can reduce their taxable income during retirement.

And these can all cause paralysis by under-analysis.

While the road is long and complex, it all starts with a budget. If you know where your money is going to today, you will be able to estimate where it’s going to go once you retire. Sure, some expenses will be reduced, but others, typically travel, and specifically healthcare, will certainly rise.

Consider tapping into your tax-deferred accounts now

This is an approach that is both unique to each person’s financial situation AND potentially a massive money saver.

Now, speak to a fiduciary professional if you elect to tap into your IRAs and 401(k)s before required minimum distributions kick in (RMDs now begin at age 73). But I have seen people - well-meaning, conscientious savers - sit on their traditional IRAs, SEP IRAs, or their various retirement accounts (401(k)s, 403(b)s, etc.), while spending down their other savings, only to find that when RMDs kicked in, they were forced to take such massive withdrawals that they ended up having to pay thousands - even tens of thousands - more in taxes than they might have had they planned better and reduced those balances earlier.

It really does happen, and yes, it seems counterintuitive, right up until it doesn’t.

Listen, it’s normal to want to protect your robust 401(k) from the world. It’s been part of your life, perhaps for decades. And just like anything you nurture, over the years, you’ve watched it grow from a sapling into a magnificent Sequoia.

But virtually anyone with a large retirement account balance should speak with a professional about whether it might be financially prudent to draw that account down, or roll it over, sooner rather than later.

If necessary, allow your advisor to remind you that you’ve earned this

I’ve been there. That is, I’ve sat across from a couple with many millions in savings, and virtually no expenses, and had them question whether they could risk a trip to Europe.

After our meeting, I know they felt better about going.

A marrow-deep fear of scarcity is bred into many of us. (Especially if your parents were Depression era children). If you’ve saved well, I encourage you to live well. That is, knowing precisely what you have, where it goes, and what you can safely spend so you can unworriedly enjoy the fruits of your labor is a superpower.

Use it wisely – but use it.