The 2% Trap: Why Retirees Spend Far Less Than They Could, Ep #391

Retirement Starts Today

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Many retirees enter their golden years with the goal of financial security, but what if the biggest risk isn’t running out of money—it’s not spending enough of it? A surprising new study reveals that retirees are withdrawing just 2% a year from their savings—barely half of what’s traditionally considered safe.

This cautious approach might seem responsible, but it often leads to unnecessary frugality, missed experiences, and larger-than-expected tax burdens later in life. The hesitation to tap into personal savings, even when there's plenty available, raises an important question: What’s stopping retirees from spending with confidence?

Research shows that retirees feel much more comfortable spending guaranteed income from sources like Social Security and pensions while being reluctant to withdraw from their own investments. This behavioral tendency can leave money unspent for decades, only to be forced out later through required minimum distributions (RMDs) that create tax inefficiencies. Meanwhile, large inheritances often arrive too late to make a meaningful impact on the next generation.

Rethinking the 2% mindset means understanding what keeps retirees locked into ultra-conservative spending habits and finding ways to turn savings into income that feels reliable. A simple shift—such as automating monthly withdrawals or adjusting expectations around financial security—can open the door to a more fulfilling retirement. The money was saved to be spent, and spending it well can be just as important as saving it wisely.

Spending too little can be just as costly as spending too much. With the right approach, retirees can enjoy their wealth now while keeping future financial security intact.

Outline of This Episode

• (0:00) Why Retirees Spend Far Less Than They Could
• (1:46) The study: Retirees underspending their savings
• (3:33) Why the 2% problem exists
• (6:10) The impact of underspending on taxes & an inheritance
• (8:11) The role of financial planning & behavioral coaching
• (9:20) Possible solutions: Turning savings into reliable income
• (11:04) Listener question: A simple withdrawal plan

Resources & People Mentioned

• The Retirement Podcast Network
• David Blanchett – Head of Retirement Research at PGIM DC Solutions
• Michael Finke – The American College of Financial Services
• Die With Zero by Bill Perkins – Book on intentional retirement spending

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