The Top Step to Take When Retirement Spending Exceeds Your Income

For many retirees, the worry is not spending too much, but spending too little and missing out on the life they worked for. Still, some people face the opposite problem: their retirement income is being used up faster than planned. Financial planners say that situation is less common, but very familiar.

“We definitely have clients who underspend, and we have clients who overspend,” said Jorie Johnson, a CFP with New Jersey-based Financial Futures. “The hard part is finding the balance.”

Start by Tracking the Money

Johnson said the most important step for retirees who are spending too much is figuring out where their money is actually going, since that often differs from what they assume.

“The first step is understanding where it is going,” Johnson said. “The second step is helping them see when they would run out of money.”

Luke Lloyd, a CFP and president and CEO of Kentucky-based Lloyd Financial Group, agreed.

“Most people think they budget,” he said. “But then when you talk to them, you realize they don’t really know where their money is going.”

Subscriptions are often part of the problem. Lloyd said retirees may be paying for many small recurring charges, including streaming services, apps and memberships. Those costs can quietly total hundreds of dollars each month without feeling excessive.

Who Is Most Likely To Overspend

Anyone can run into this issue in retirement, but Lloyd said it tends to show up more often in a few groups.

“We see it a lot in small-business owners,” he said. “They may have taken a really big risk on themselves. Maybe they were cash-poor for 20 to 30 years. Now, they want to reward themselves. ‘Now I want to buy that bigger house. Now I want to buy that boat.’”

Couples who receive a large inheritance can also struggle, he added.

“Anytime someone is not self-made, it’s very common for them to want to up their lifestyle a little too quickly,” Lloyd said.

Johnson said retirees with weak communication about money are also vulnerable, especially when spouses keep separate finances. Even so, she said the biggest overspending problem she sees is something else.

“Grandparents spending money on their grandchildren,” she said. “That’s where we really see the overspending.”

Johnson emphasized that spending on grandchildren is not the issue by itself. The problem is losing sight of limits. She recalled one retired couple who set a very generous standard for what they would cover for their first grandchild. When their four adult children later each had one to four children of their own, the arrangement became impossible to sustain. A family meeting was needed to reset expectations.

Ways To Know if You Are Spending Too Much

The long-standing “4% rule” advises retirees not to withdraw more than 4% of their nest egg each year. For instance, someone with $1 million saved would aim to withdraw no more than $40,000 annually.

Advisers say the guideline can still be useful, but it is not one-size-fits-all. Lloyd expects inflation to remain a factor and suggested that some retirees may want to reduce that figure to 3% or even 2%. Johnson also noted that taxes are often left out of the calculation. Money taken from tax-deferred, taxable and tax-free accounts is not treated the same way, and overlooking those differences can give retirees a false sense of how much they truly have available.

Another warning sign is turning to credit cards to pay everyday bills. Lloyd suggested setting up monthly distributions so living expenses are covered from a bank account rather than by borrowing.

No matter whether someone follows a 2%, 3%, 4% or another withdrawal approach, retirees may decide to spend a little more during the early years of retirement, often called the “go-go years.”

“Those are the years to do it because you’re younger,” he said. “Between the ages of 80 and 100, you may be less likely to be able to do those things you want to do.”