The retirement problem no one warns you about: underspending, and giving yourself permission to enjoy your savings

Most retirement advice warns about the danger of running out of money. But there is a quieter, more common, and rarely discussed problem at the other end: many Australian retirees underspend. They live more frugally than their assets would comfortably allow, draw down their savings far more slowly than they planned, and a substantial proportion die with most of their retirement savings — and often their super — still intact. This is not a hunch. Australia's Retirement Income Review, the Treasury-led examination of the system completed in 2020, found that most retirees die with the bulk of their wealth intact, and that many treat their superannuation as a nest egg to be preserved rather than a pool of money to be consumed across retirement. The causes are largely psychological rather than rational — the difficulty of switching from a lifetime of saving to spending, a deep fear of running out, worry about future aged care costs, the absence of a regular "paycheck," and the simple discomfort of watching a balance fall. The cost is real: retirees deprive themselves of the travel, experiences, comfort, and help to family their savings could fund, often during the early, healthier years when money buys the most enjoyment — and then leave it all unspent. A genuinely valuable part of retirement advice is helping retirees do the opposite of the usual warning: to give themselves permission to spend, and actually enjoy the retirement they spent decades funding.

How well-documented is the underspending phenomenon?

The pattern is not anecdotal — the Retirement Income Review documented it directly. It found that many retirees draw down at the minimum rates, which are lower than the level needed to exhaust their superannuation by life expectancy, and that most people do not draw down their savings at all — instead living off the income those savings generate while leaving the capital untouched. The review described a genuine disconnect between how the system is designed and how retirees actually behave: the system assumes people will spend their super across retirement, while many believe they should only ever touch the returns and preserve the capital. The result is consistent — money saved over a working life to fund a comfortable retirement too often sits largely unused, while the retiree lives more modestly than they need to.

A central piece of this is the legislated minimum drawdown. When you move super into an account-based pension, the law requires you to withdraw a minimum percentage of the balance each year — 4% if you are under 65, rising with age to 5% at 65 to 74, 6% at 75 to 79, and stepping up to 14% from age 95. The crucial point that gets lost is that this is a regulatory floor, not a spending recommendation. It is the least you are allowed to take, set so that super is genuinely drawn down for retirement rather than left to accumulate tax-free as an estate. Yet a great many retirees take only the minimum and treat it as "the right amount," when for most it sits well below what they could comfortably and sustainably spend.

What actually causes underspending?

Because the causes sit in behaviour rather than arithmetic, they are persistent. The shift from accumulation to decumulation is genuinely hard: a lifetime spent saving and watching the balance grow does not easily reverse into spending and watching it fall. Fear of running out is powerful — not knowing how long they will live, retirees over-insure against the worst case by under-spending. The Retirement Income Review noted exactly this, observing that fear of running out of money, combined with low financial literacy and a lack of products that protect against outliving your savings, drives conservative drawdown. Fear of future costs, especially aged care and health, looms as a large unknown that retirees hoard against. Loss aversion means seeing the balance drop feels like a loss, and the discomfort drives frugality. The absence of a "paycheck" matters more than people expect — a lump sum simply does not feel spendable the way a regular salary did. And some have a genuine bequest motive, though many underspend without ever consciously deciding to leave money behind.

What is the real cost of underspending?

The cost is the part that deserves more attention. Underspending means foregoing the travel, experiences, comfort, help to children and grandchildren, and general quality of life the savings could fund. The timing makes it worse: the early retirement years — often called the "go-go years" — are when money buys the most enjoyment, because health permits travel and activity. Underspending during those years is a particular loss, because later (the "slow-go" and "no-go" years) declining health limits what can be enjoyed regardless of how much money is available. Many retirees live far more frugally than necessary for years or even decades, then die leaving large unspent balances — having effectively deprived themselves of a better life for no real benefit. The regret of not having enjoyed the retirement they funded, or of leaving children an inheritance that could have been enjoyed or given to them earlier when it would have helped more, is a genuine and avoidable harm.

How does guaranteed income unlock spending?

One of the most important and least understood levers is guaranteed income. Retirees with guaranteed, regular income — the Age Pension, a defined benefit pension, or an annuity — tend to spend more freely than those relying solely on a lump sum or an account-based pension, because the security removes the fear of running out. The Retirement Income Review pointed to the shortage of products offering this kind of longevity protection as one reason retirees draw down so cautiously. The Age Pension is central here: it is the means-tested government payment administered by Services Australia, and it provides a guaranteed, indexed income floor that lasts for life, meaning a retiree cannot truly run out entirely. Better still, the way the assets test works, the pension often increases as a retiree's assessable assets fall — the family home is excluded from the test, and as other assets deplete the part pension grows to fill the gap. Recognising that this floor exists and rises can substantially ease the fear. Allocating part of the portfolio to a lifetime annuity — guaranteed income for life — can give retirees the security to spend the rest more freely. The key insight is that guaranteed income unlocks spending structurally; it does not rely on the retiree overcoming their fear through willpower alone.

How can retirees reframe the nest egg?

Alongside the structural fix sits the mindset work. The blunt truth is that the savings exist to be used — the entire point of a lifetime of saving was to fund retirement, and the money is meant to be spent, not preserved indefinitely. "You can't take it with you" is a cliché because it is true: unspent savings benefit heirs, not the retiree. The deliberately provocative "die with zero" idea — that the ideal is to use one's resources for maximum life experience rather than dying with a large unspent surplus, while keeping a sensible safety margin — captures the reframe, even if few would follow it literally. And where a bequest is genuinely intended, giving while living is often better than leaving it all at death: children may need the help more in their forties and fifties, with mortgages and young families, than as inheritors in their sixties, and the retiree gets to see the benefit of their generosity. Reframing the nest egg from "something to protect" to "something to use well" is the heart of giving permission to spend.

How does modelling turn reframing into confidence?

Reframing becomes real when it is backed by numbers. Showing a retiree, through realistic modelling, that a higher spending level is sustainable across their likely lifespan — even allowing for a long life, aged care, and market falls — gives them evidence-based permission to spend more. Scenario-testing the worst cases (living to 100, a market crash, significant aged care costs) and demonstrating that they are survivable eases the fear that drives underspending. The modelling typically shows the Age Pension backstop kicking in as assets fall, so the income does not collapse even if savings deplete. And visualising the cost of underspending — the trips not taken, the experiences foregone — can motivate change. For many retirees, simply seeing the numbers that prove they can afford to spend more is transformative; the fear was never rational, and evidence dissolves it.

How can a 'retirement paycheck' make spending feel permitted?

Structure addresses the missing-salary problem. Setting up a regular, automated transfer from super or investments into the everyday bank account — replicating the rhythm of a salary — gives retirees psychological permission to spend that amount, because it arrives like income rather than requiring them to "dip into savings." Account-based pensions already let you choose monthly, quarterly, half-yearly or annual payments, so the rhythm of a paycheck is simple to set up. A dedicated spending account that is explicitly "allowed" to be spent removes the guilt. A bucketing approach — a spending bucket for this year, an income bucket, and a longer-term growth bucket — clearly delineates the money that is there to be spent. The principle is to align the drawdown with the spending plan the retiree actually wants, rather than defaulting to the minimum and treating that as the ceiling. Structure does the work that willpower struggles with: when spending money arrives automatically and is clearly permitted, retirees spend it.

How do you balance this against genuine risks?

None of this is an argument for reckless spending. People do live long lives, so a sensible plan provides for longevity — a long life, not just an average one. A reasonable buffer for potential aged care costs is prudent. And sequencing risk — over-spending early in a market downturn, locking in losses — is a genuine danger. The goal is a sustainable higher spending level that funds a good life: neither depriving oneself through chronic underspending nor recklessly depleting the savings. The point is that most underspenders have real room to safely spend more — the modelling usually shows it — and the task is to find and fund that sustainable, more generous level, not to abandon prudence. It is about right-sizing the spending to the assets, in both directions.

Worked examples

These two cases show the underspending problem and its resolution. They are illustrative only and not personal advice.

Margaret, 74, is a healthy and active widow. She has $390,000 in super and draws only the minimum pension, owns her home, and receives a part Age Pension. She lives very frugally — rarely travels, hesitates over small luxuries, and worries constantly about running out. Her balance has barely fallen since she retired, and her two children are financially comfortable. On these facts, Margaret is a classic underspender depriving herself unnecessarily. At her age the legislated minimum drawdown is just 5% — about $19,500 a year — which she has been treating as a ceiling rather than a floor. Realistic modelling would very likely show she can spend materially more than that across her likely lifespan, even allowing for aged care and a long life, with the Age Pension rising as her assets fall to hold the income floor. On these facts it is generally rational to model her sustainable spending and show her the evidence: she can afford to travel, help her grandchildren, and enjoy her go-go years. Because her children are comfortable, she might also consider giving some while living and seeing the benefit. Setting up a regular automated transfer above the minimum, into a spending account she is "allowed" to spend, gives that decision a structure — turning permission into habit while she is healthy enough to enjoy it.

Robert, 70, recently retired, is anxious about spending. He has a moderate balance, and his income comes entirely from an account-based pension plus a small part Age Pension, with no other guaranteed income, so the balance feels precarious to him. On these facts the root issue is the lack of guaranteed income feeding his fear — precisely the pattern the Retirement Income Review identified, where the absence of longevity-protection products drives cautious drawdown. On these facts it is generally rational to lead with the Age Pension as a guaranteed lifelong floor — he cannot run out entirely, and the pension grows as his assets fall — and to consider allocating part of his portfolio to a lifetime annuity to create more guaranteed income. With a larger secure income base, Robert is more likely to feel safe enough to spend his account-based pension on the lifestyle he actually wants. Modelling the sustainable spending gives him the evidence, and a retirement-paycheck structure makes it concrete. The guaranteed-income approach addresses the source of Robert's fear structurally, rather than asking him simply to worry less.

For retirees who underspend, helping them give themselves permission to enjoy their savings is among the most valuable and human contributions an adviser can make. The work is to identify the underspending — drawing only the minimum, large unspent balances, frugality inconsistent with the assets — explore the underlying cause, model sustainable spending to show with evidence that more spending is affordable, highlight the Age Pension floor and consider guaranteed income to unlock spending, reframe the nest egg as something that exists to be used, build a retirement-paycheck structure that makes spending feel permitted, and balance all of it against the genuine risks of longevity, aged care, and sequencing. The standard retirement fear — running out — gets all the attention, but for a great many retirees the real, avoidable harm is the opposite: living more meanly than they need to, through the very years when money could buy the most joy, and dying with the savings largely untouched. Giving those people evidence-based permission to spend is not recklessness. It is helping them actually have the retirement they spent a lifetime funding.

Sources

• Treasury — Retirement Income Review Final Report (2020)
• MoneySmart — Account-based pensions (minimum drawdown rates)
• Services Australia — Assets test for Age Pension