A primary fear for older adults is running out of money in retirement, but shockingly, many retirees are actually underspending, potentially depriving themselves of happiness or compromising their health.

“I think it depends on the cohort, and it depends on the time period, but research from Vanguard and others has shown that, in fact, underspending is a significant issue with many retirees, especially as we’ve had sort of the steady march upward in terms of equity prices,” Christine Benz, director of personal finance and retirement planning for Morningstar, said on May 18 at the Morningstar Investment Conference.

Benz said that there are many retirees who quite underspend relative to what they could spend, and that may be a choice — they may have a strong bequest motive that is motivating them to spend less, for example. More likely, however, Benz said when looking at the data over the past decade, that tendency to underspend is a bigger deal and a bigger problem. 

“I sometimes will meet an 80 plus year old retiree who will come up and proudly tell me that he spends 3% of his portfolio per year, so he’s just taking out that fixed percentage of that portfolio, and I’m thinking, ‘Holy cow, I hope that your quality of life is good at that level,’ because to me, that sounds way too small of a percentage — especially at that life stage,” Benz said.

A bucket approach, which Benz was introduced to more than a decade ago by a now-retired financial advisor, can help ease anxiety for retirees. The method consists of “basically a cash bucket that he bolted onto the long-term portfolio that he was managing for [clients],” Benz said. “It just gave his clients an extraordinary amount of peace of mind with the long-term plan.”

In environments like the current one, in which portfolios have dropped quite a bit, the cash bucket — cash that’s been set aside — allows retirees to continue with their lifestyle and keep doing the things that constitute quality of life. 

While advisors don’t have to use buckets, Benz said that they serve as a helpful construct when recommending asset allocation to clients and explaining how volatility in the market is not going to disrupt any near-term plans. 

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