I have been a financial advisor for over a decade, and I’ve heard so many retirees tell me, or imply, that they should :”Never spend your principal.” But I need to tell you: I completely disagree with this outdated advice that might be keeping you from enjoying the retirement you’ve worked so hard to achieve. Research reveals a surprising truth about retirement spending that challenges everything we’ve been taught about managing money in retirement.
According to data from the Bogleheads Conference, only one out of seven retirees ever spends any of their principal. This statistic might seem reassuring at first glance. Still, it reveals a deeper issue: many retirees are living far below their means, potentially sacrificing quality of life for fear of something that is very likely to never happen (them running out of money)
The reality is that most people who successfully save for retirement don’t run out of money. In fact, most Americans who prepare adequately for retirement don’t deplete their savings, many even accumulate additional wealth over time.
A recent U.S. study by Blanchett and Finke found that retirees spend about 80% of their lifetime income, yet use only 2% of their savings annually, suggesting that wealth often remains stable or grows over the years.” (Retirees Spend Lifetime Income, Not Savings). Understanding why this happens and why it’s perfectly acceptable to spend some principal—can transform your retirement experience.
Why Most Retirees Never Run Out of Money
The Stark Reality of Retirement Savings
Before exploring why spending principle is acceptable, it’s important to understand the broader context of American retirement preparedness. “Vanguard’s How America Saves 2024 study reveals sobering statistics: the median balance across Vanguard-recordkept 401(k) and other defined contribution plans is only about $33,000. Even among participants aged 55 and older, the median balance reaches just $80,000.
These modest savings translate to approximately $267 per month in retirement income—barely enough to cover basic utilities and a cell phone bill. However, those who do save substantial amounts for retirement face an entirely different challenge: they often save too much relative to their actual spending needs.
Five Key Reasons Retirees Maintain Their Wealth
Behavioral Adjustments During Market Downturns
Retirees don’t withdraw money unthinkingly from their accounts. When market conditions deteriorate, they naturally reduce their spending. This flexibility helps preserve their principal during challenging economic periods and extends the life of their portfolios.
Oversaving Throughout Their Careers
Many dedicated savers accumulate portfolios that far exceed their actual retirement needs. They become comfortable living on less than they could safely spend, often maintaining the same frugal habits that helped them build wealth in the first place.
Conservative Withdrawal Strategies
Historical research on the 4% withdrawal rule shows that retirees who follow this strategy not only avoid running out of money over a 30-year retirement, but often finish with their portfolios intact and in many cases larger than when they started. Only in rare scenarios do retirees following this approach deplete their savings entirely.
Longevity Considerations
The “Rich, Broke, or Dead” chart from engaging-data.com illustrates a crucial reality: by age 90, approximately 80% of people have passed away, while less than 5% have exhausted their savings. Among those still living at 90, significantly more are wealthy than broke. For most retirees to run out of money, two unfortunate events must occur simultaneously: poor investment returns and exceptional longevity.
The “Never Spend Principal” Mentality
This deeply ingrained belief system prevents many retirees from accessing their wealth. While this approach offers certain benefits (simple spending calculations, guaranteed inheritance, and zero risk of running out of money) it often comes at the cost of enjoying retirement to its fullest potential.
The Psychology Behind Spending Reluctance
Understanding the Emotional Challenge
The reluctance to spend principal isn’t just about financial math—it’s deeply psychological. After decades of accumulating wealth, switching from saver to spender requires confronting two difficult truths: your earning years are behind you, and your time is finite. Neither realization comes easily.
For many retirees, investment income feels similar to their former paychecks, making it psychologically easier to spend. Principal, however, feels like the foundation of their security, creating emotional barriers to accessing these funds.
A Behavioral Approach to Spending
While mathematically suboptimal, focusing on income-generating investments might be behaviorally smart if it enables appropriate spending. Personal finance is 80% personal and only 20% finance. If structuring your portfolio to generate more income helps you spend adequately, it may be worth the trade-off.
Consider modest adjustments like paying off real estate mortgages to increase property income, allocating some funds to real estate debt funds, increasing bond allocations slightly, or adding a dividend tilt to your stock portfolio. Avoid extreme measures like concentrating entirely on high-yield but risky investments.
Practical Strategies for Spending Principal
Start with Required Minimum Distributions
Many financial advisors report that elderly clients reinvest their Required Minimum Distributions (RMDs) after paying taxes. This approach represents a missed opportunity to enjoy retirement more fully. While RMDs increase with age, life expectancy simultaneously decreases, making this a reasonable starting point for principal spending.
Create Spending Accountability
For those struggling to spend adequately, consider establishing a minimum spending requirement with consequences for underspending. You might commit to donating unspent funds to charity or, more creatively, to a political cause you oppose. This approach can provide the motivation needed to overcome psychological spending barriers.
The Principal Spending Sweet Spot
Here’s the reality most financial advisors won’t tell you: if you’ve saved enough to worry about spending principal, you’ve probably saved too much. Consider a retiree with $1 million who follows the traditional “live off dividends and interest only” approach. At today’s rates, they might generate $30,000-40,000 annually—forcing them to live on roughly half of what the 4% rule would safely allow.
Meanwhile, that same $1 million could comfortably support $50,000-60,000 in annual spending through a combination of dividends, growth, and yes—principal. The mathematical reality is straightforward: most retirees following reasonable withdrawal rates (4-6%) will either pass away with substantial wealth remaining or live long enough to see their portfolios recover from any temporary downturns.
The key insight? Your money has an expiration date—your life. A portfolio that lasts 40 years when you only need it for 25 represents a missed opportunity to enhance your retirement experience. You’re not planning to live forever, so why is your money?
Action Steps for Implementing Principal Spending
Assess Your Current Financial Position
Begin by calculating your total retirement assets and annual expenses. Determine what percentage of your portfolio would be required to maintain your current lifestyle, then consider whether you’re being overly conservative in your spending approach.
Develop a Flexible Withdrawal Strategy
Rather than adhering rigidly to income-only or principal-only approaches, create a balanced strategy that considers both your financial needs and emotional comfort level. Start conservatively and gradually increase principal withdrawals as you become more comfortable with the approach.
Plan for Different Life Stages
Your spending needs and risk tolerance will likely change throughout retirement. Plan for potentially higher expenses in early retirement when you’re more active, followed by lower expenses in your middle retirement years, followed by higher expenses in your later years when health issues arise.
Consider Professional Guidance
A fiduciary financial advisor can help you develop a personalized withdrawal strategy that balances your financial security with your quality of life goals. They can also provide an objective perspective when emotional barriers to spending arise.
Taking Control of Your Financial Future
Spending your principal in retirement isn’t about being reckless—it’s about using your hard-earned wealth to live the retirement lifestyle you’ve always wanted. You saved diligently for years, not just to let your money sit there, but to enjoy it. And if leaving a large inheritance is your goal, that’s great too.
Many successful savers never run out of money, so take confidence in knowing that you can fully enjoy your retirement. You’ve earned it principal and all.
Ready to make the most of your retirement? Start planning today.