Moving from saving to spending as you retire requires changing strategies, confronting biases, and building new spending plans as you decumulate assets.

It’s a delicate transition. When we move into the life stage of retirement, one challenge we face is the shift from accumulating to decumulating assets—a tricky process emotionally and financially. After building up our wealth over many years, we’re now beginning to spend it down. A complicating factor is that we’re prone to acting on a bias behavioral economists call loss aversion: an inherent bias to experience the pain of an actual or anticipated financial loss much more acutely than we feel the pleasure of the same-sized gain. (Some studies show that retirees are five times more sensitive to losses than non-retirees, or hyper loss averse.) That’s a problem, because hyper loss aversion can lead to—we’ll be generous here—less than optimal decision making.

Becoming aware of the problem is more than half the battle. That process will vary, as the bias manifests itself in different ways for different people. Some might under allocate to equities or refuse to touch principal, and thus take on unintended risk to find income. Others might impulsively sell investments to raise cash when markets get volatile—or take Social Security benefits earlier than a sound financial plan would recommend. The behavior varies, but the underlying bias is essentially the same.

When we recognize how an intense aversion to loss might affect our decisions, we can take action to address the issue. We’re best off when we strive to be intentional—to make informed, empowered choices about how we want to navigate the process of retirement decumulation. In this article, drawing on results of a recent global research survey we conducted of 1,500 respondents, we’ll discuss specific steps you can take to protect yourself from hyper loss aversion.

The first step in addressing hyper loss aversion: Make a plan for your wealth, and revisit and adjust it as needed. Be intentional about your goals—you might want to spend all your wealth in your lifetime, or you might look to prioritize your legacy for future generations. Once you have a plan, you can see if your resources are aligned with your intentions. Do you have enough, more than enough, or not enough? In our survey, a substantial majority said that having a plan would make them feel more confident about achieving their goals in retirement.

When you’re thinking about the transition from accumulating to decumulating assets, it’s important to be clear about your resources and spending to determine just how much you can spend in retirement. Expenses don’t disappear, as our survey shows: 59% of retirees report they are spending more than they did when they were working full-time, while only 14% are spending less. For those who are spending more, family plays a big role. The majority of retirees in our survey are spending more on their family members in retirement, and most non-retirees plan to do so. If you think you’ll be spending much less in retirement, you may be mistaken, and as a result, undersaving. On the other hand, some retirees may be spending less than they could be because they have an unfounded fear of running out of money.

How will my spending habits change in retirement?

Source: J.P. Morgan Private Bank Research, 2020. Total N = 1,500.
The graphic shows two pie charts, one for retirees and one for non-retirees. It depicts the percentage of survey respondents in each group who anticipate/have experienced spending increasing, decreasing, or staying the same in retirement. It shows that the majority of non-retirees anticipate that their spending will increase in retirement, and the majority of retirees concur that this is the case.

Systems and structures can help rein in the bias to hyper loss aversion. Bucketing assets that are designed to be spent down in your lifetime separately from assets that are meant to last beyond your lifetime can go a long way to warding off hyper loss aversion and help in your retirement financial planning.

Other approaches can address the mixed emotions—excitement coupled with nervousness—shared by retirees and those who are nearing retirement. Recreating the experience of a regular paycheck is one effective technique in coping with the retirement transition. For example, you might send monthly distributions to your bank account from your portfolio. (In this context, we’ll note that it can be especially helpful to aggregate information about all your accounts in one place.) It makes sense to establish your withdrawal plan ahead of time—to set up how you’re going to turn your portfolio into a paycheck. Instead of feeling guilty about taking a distribution, you can feel empowered. In other words, you have a plan for your wealth, and you’re spending your resources the way you intend.

You might assume that you should avoid making financial decisions with any emotional bias, but that’s not necessarily true. There are emotional and financial elements to every financial decision. When you acknowledge them and weigh their respective returns on investment (ROI), it can help you make decisions that align with your values. Maybe financial models tell you that keeping your mortgage in retirement makes sense quantitatively, but you know you’ll sleep better if you pay off the debt. In this case, the emotional ROI outweighs the financial ROI, and that’s fine. Just acknowledge why you’re making the decision and understand the implications it may have for other future decisions.

Similarly, you may deliberately decide to take on less risk in your investments to avoid the unease you experience in volatile markets. You accept that the choice might entail a potential tradeoff—there could be a smaller legacy for your beneficiaries—and that’s OK. On the other hand, you might consider the long-term effects of a reduced risk profile in your portfolio and conclude that you have to accept the discomfort you feel in volatile markets. In this case, the financial ROI prevails.

The life chapter of retirement calls on us to make new choices and experience new realities. One reality is making the shift from accumulating to decumulating assets. It’s never a simple process, and hyper loss aversion can often be a complicating factor. But when we’re aware of our biases, and take steps to address them, we can be more intentional about our choices and, ultimately, make better decisions.