2 Signs You're Underspending in Retirement -- and Why It's a Problem

Most people carry one big fear with them into retirement -- running out of money. And after spending decades funding your IRA or 401(k), the last thing you want to risk is that money running out.

But while many retirees do, in fact, risk overspending, underspending can be a problem too. If you're so worried about depleting your savings, it's hard to enjoy the wealth you hustled to build. Here are a couple of signs you're spending less than what you can afford.

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1. You're withdrawing way less than 4% of your portfolio each year

Just because many people opt to follow the popular 4% rule in retirement doesn't mean you have to do the same. It may be that you don't need to withdraw 4% of your portfolio each year because your expenses are modest. Or it may be that you're invested more conservatively and should therefore be sticking to a lower withdrawal rate intentionally.

But if you're consistently withdrawing way less than 4% of your IRA or 401(k), it means that you may have a lot more wiggle room than what you're letting yourself enjoy. So rather than set a monthly budget based on your needs only, at least partially base that budget on what you can comfortably afford to withdraw.

2. You keep delaying goals and experiences

Many retirees have big goals -- see new countries, put in a backyard pool for relaxation, or buy the nice car that wasn't affordable in the days of child care expenses and hefty mortgage payments. But if you keep postponing your plans and experiences because you're afraid to tap your nest egg, it could be a sign that you're underspending.

The problem is that certain goals of yours may be health-dependent. That European vacation may not be doable or enjoyable seven years from now if your mobility becomes more limited. And the nice car you've been dreaming of might spend most of its time in your driveway if you buy it in 10 years, at which point you should be contemplating giving up the keys.

Changing your mindset is crucial

When you spend your entire career saving money for retirement, and when you're used to being frugal, it's difficult to snap your fingers and start raiding your IRA or 401(k). But while financial security in retirement is certainly important, so is enjoying the money you worked hard to accumulate.

That's why it's important to find a safe withdrawal rate for your savings and use that to inform your spending decisions. If the numbers say you can afford to withdraw $70,000 safely per year, why limit yourself to $30,000? And if you don't want to withdraw all $70,000, consider meeting in the middle with a $45,000 annual withdraw that gives you a nice vacation budget.

Underspending might give you peace of mind, but it could also put you at risk of taking too much money with you to the grave. So it's important to strike a balance that allows you to preserve your savings without denying yourself the lifestyle and experiences you deserve.

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