Frugality is generally a good thing, but even good things can be taken too far. And there have been a number of studies recently indicating that some older people may be having a tough time spending the money they diligently saved over the years.

Last year, Michael Kitces drew attention to a consumption gap between what wealthier retirees (those with over $500,000 in savings) could and should spend versus what they actually do spend.

A more recent analysis of a series of University of Michigan studies may help explain retirees’ reluctance to spend: They’re simply less confident about their financial future than younger people. The analysis found that people over age 64 are 30% to 40% less optimistic about their financial future than people under age 35. Understandably, a lack of confidence about the future would lead one to spend conservatively. The key question is, “How conservative is too conservative?”

Research and the real world

As with most studies, those mentioned above describe generalized findings. But just as “all politics is local,” so is retirement planning.

What's important is figuring out how much you can spend each year in retirement. However, even with a sophisticated retirement planning calculator, this is far from a precise science. You definitely don't want to overspend and run out of money, but you don't want to under-spend either, living so frugally that you don’t enjoy your later years.

So, how do you strike the proper balance between wisely making sure you will have enough to provide for your family throughout retirement while still feeling the freedom to enjoy some of your savings? Here are three ideas to consider.

Delay retirement. Continuing to work throughout your 60s should provide:

  • The ability the fund more of your later years with earned income instead of retirement savings
  • The ability to continue adding to your retirement savings
  • Perhaps better health insurance and less out-of-pocket medical expenses
  • A higher monthly benefit from Social Security once you begin taking benefits, either at Full Retirement Age or age 70

Consider buying a longevity annuity. Such annuities, also called “deferred income annuities,” are designed to protect against the risk of a long life. Whereas an immediate annuity purchased by a 65-year-old today would begin providing income right away, a longevity annuity purchased by the same person today would begin providing income at age 75, 80, or later.

As you might expect, the initial cost of a longevity annuity is far less than the cost of an immediate annuity. For example, according to Vanguard, if a 70-year-old man bought an immediate fixed annuity today that pays $2,000 per month to him or his 70-year-old wife (“joint & survivor”), it would cost about $380,000. If that same person bought a deferred income annuity that would pay $2,000 per month starting at age 85, it would cost $116,000 today. (Examples generated at Income Solutions, which you can access through Vanguard if you have an account).

Knowing this income is set to begin flowing at age 85 may reduce this couple’s concerns about their nest egg having to provide for them should they live an especially long life.

Consider using the bucket approach. With this approach, you enter retirement with your nest egg distributed across several buckets. One, containing 3-5 years’ worth of living expenses, would be in savings. Another, containing the majority of your portfolio, would be invested. 

When the market is doing well, you tap the bucket containing the invested portion. When it isn’t, you tap the savings bucket, allowing time for the market — and the invested portion of your portfolio — to recover.

This, too, can give you peace of mind about how much you’re spending because your entire nest egg is not subject to the ebb and flow of the stock market. (Read more about this approach in The Retirement Investing Challenge: Keeping Up With Inflation While Limiting Risk)

If you’re now in retirement, what have you found helpful in giving yourself the freedom to spend at an enjoyable pace while at the same time making sure your retirement savings will last throughout retirement?