The Psychology of Retirement:
Understanding behavioral risks that can suck the life out of retirement
Financial planning is just one part of retirement planning. Depending on your personality type, your biggest struggles with an upcoming retirement may come from the planning that is much more difficult to quantify or qualify.
Our human behavior
Even well-prepared retirees struggle with:
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Fear
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Identity shifts
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Emotional decision-making
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Spending hesitation
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Or a list of other various psychological unknowns
I'm Dan Murphy, and I've been a Financial Planner since 2007. I started just months before the Great Recession. Once the market collapsed, I realized how important a role our psychology and how we think about financial decisions play into our financial success.
My goal with this article is to help you identify some psychological blind spots you may encounter, and give you helpful tools to overcome them.
My focus in each section is to give you tools for success, or an insight that may help you to overcome these psychological biases.
Please note - we all find different pieces of information useful to make decisions. If the tools provided are not helpful and you have another idea that could be helpful to see, please reach out to me and I'll do my best to provide that for you!
What are some of the most common psychological risks near retirement?
The Fear of Running out of Money
The Data:
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A study from Allianz Life found that 64% of Americans fear running out of money more than death
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~48–58% worry about outliving savings
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According to Vanguard, retirees withdraw ~2% annually vs ~4% guideline
What this Means to you:
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The complexity of retirement and all of the unknowns can lead you to say no to spending. Oftentimes unnecessarily.
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Uncertainty (of markets, your lifespan or healthcare) can increase your anxiety and cloud decision-making.
Behavioral Outcome:
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You can tend to underspend
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You may consider delaying your retirement
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You may feel the need to be overly conservative with your investments or spending
Insights:
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Give yourself grace. It's very hard to shift from working for a paycheck, to receiving income from new sources.
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Without spreadsheet skills or financial planning software, it can be extremely difficult to visualize both where your income will be coming from and how long it may last.
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People optimize for avoiding failure—not maximizing life.
Tools:
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Fidelity has a helpful tool that can help to show your estimated investment withdrawals.
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This offers high level income planning, but I feel it lacks a good visual to help you see what your accounts may look like in the future with withdrawals.
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Key Bank has an even more detailed tool that will take a bit more thinking and input from you.
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I really like this tool because it is relatively simple, and most importantly, it helps you to visualize your account balance throughout the years (Balance by year tab). However, I find the inputs to be a bit confusing.
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Right Capital is the financial planning software I use. If you would like to reach out for a consultation, I can get you set up with this more comprehensive financial planning software.
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If you like spreadsheets, I have built a fairly comprehensive spreadheet that can help visualize your spending, account values, Social Security income and even incorporates your home equity. ADD LINK TO SPREADSHEET
Final Thoughts:
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In my experience, the most helpful tool to overcome this fear is a good visual that shows your potential account values throughout retirement. This can give you some sense of peace by taking the unknowns and showing you that, yes, you will still have money when you die.
The Data:
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A Morningstar research page suggests that about 25% of retirees struggle to spend in retirement. (they actually decrease their spending)
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This psychological risk seems more prevalent in the younger retirement generation. The generation that relies more heavily on 401k withdrawals, where the individual holds the risk, vs. Pension plans, where the company holds the risk.
What This Means:
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You have likely formed a set of financial habits over the last 30+ working years.
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"Save the money, save the money, don't touch the money"
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Go to work, get a paycheck
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Retirement tends to completely flip these habits upside down.
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Don't go to work, don't collect a paycheck.
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Stop saving and spend that money...
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Behavioral Outcome
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Especially for high savers, this is a difficult mindset to shift. Whether we realize it or not, there's a certain amount of identity we carry in being good savers.
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You’ll no longer receive the same immediate dopamine boost from routine financial wins like contributing to your 401(k) or watching your debt shrink
Insights:
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Consider a "gut check" and think whether you strongly identify as a saver or a spender. If you're reading this, you most likely are a saver
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You may be more logical-brained or someone who feels a sense of pride by checking things off the to-do list
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Try re-focusing these helpful traits towards the more joyful experience of spending your time and money how you choose.
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Tools:
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However you do your personal budgeting, do the math on how much you save
Final Thoughts:
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This is often a difficult psychological belief to overcome. A "saver" can be a type of identity. I think one of the best ways to deal with this is to find a good financial planner, financial software, or whatever tool you need in order to believe you've saved enough for retirement.
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Once you can actually believe that you've saved enough, then it can become easier to "let go" and spend your money.
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The “Save vs Spend” Identity Conflict
Loss Aversion Intensifies in Retirement
The Data
Losses feel 2–2.5x worse than gains
Older investors reduce risk after downturns
🧠 What This Means
Volatility feels more dangerous
⚠️ Behavioral Outcome
Panic selling
Over-allocation to cash
💡 Insights
Avoiding risk increases long-term failure risk
🛠️ Tools
Bucket strategy
Pre-commitment rules
📖 Anecdote
Retiree moves to cash after first downturn, misses recovery
The Retirement Spending Curve Is Real
The Data
Spending is highest early, declines, then rises with healthcare
~43% will incur ~$242K in long-term care costs
🧠 What This Means
Spending is not linear
⚠️ Behavioral Outcome
Underestimating early and late retirement costs
💡 Insights
Flat withdrawal assumptions are flawed
🛠️ Tools
Spending curve modeling
Healthcare planning
📖 Anecdote
Retiree overspends early, underprepared for later costs
The Honeymoon Effect (and Drop-Off)
The Data
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Retirement satisfaction often peaks early, then declines after ~2–3 years
🧠 What This Means
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Initial excitement fades
⚠️ Behavioral Outcome
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Increased focus on finances
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Emotional dissatisfaction
💡 Insights
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Purpose becomes critical after early years
🛠️ Tools
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Structured routines
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Purpose planning
📖 Anecdote
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Retiree enjoys first year, then struggles with lack of structure
Identity Loss Is a Real Risk
The Data
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Retirement can lead to loss of identity, structure, and social connection
🧠 What This Means
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Work provided meaning beyond income
⚠️ Behavioral Outcome
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Anxiety
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Over-focus on finances
💡 Insights
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Identity loss often drives financial conservatism
🛠️ Tools
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Purpose planning
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Social engagement
📖 Anecdote
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Former executive becomes overly focused on portfolio performance
Decision Fatigue and Cognitive Load Increase
The Data
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Behavioral research shows decisions degrade under cognitive load
🧠 What This Means
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Retirement increases unstructured decision-making
⚠️ Behavioral Outcome
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Avoidance or emotional decisions
💡 Insights
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Simplicity improves outcomes
🛠️ Tools
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Automation
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Simplified portfolios
📖 Anecdote
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Retiree overwhelmed by choices, delays key decisions
The Under-Planning for Healthcare Problem
The Data
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Long-term care costs average ~$242,000
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Healthcare is a top retirement expense
🧠 What This Means
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Risks are underestimated
⚠️ Behavioral Outcome
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Over-saving or under-preparing
💡 Insights
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Healthcare uncertainty drives fear
🛠️ Tools
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LTC planning
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Dedicated healthcare funds
📖 Anecdote
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Retiree forced to adjust lifestyle due to unexpected care costs
Overconfidence Before Retirement
The Data
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Risk tolerance often peaks before retirement
🧠 What This Means
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Confidence is highest when risk is greatest
⚠️ Behavioral Outcome
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Overexposure to equities
💡 Insights
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Timing risk matters more than return
🛠️ Tools
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Pre-retirement stress testing
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Risk rebalancing
📖 Anecdote
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Retiree enters downturn immediately after retiring
Retirement Anxiety Is Rising (Even Among Wealthy)
The Data
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64% fear running out of money
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Wealth does not eliminate anxiety
🧠 What This Means
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Anxiety is psychological, not financial
⚠️ Behavioral Outcome
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Underspending
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Delayed retirement
💡 Insights
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More wealth can increase fear
🛠️ Tools
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Income clarity
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Structured planning
📖 Anecdote
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High-net-worth retiree still feels financially insecure
The Gap Between Planning and Reality
Loss Aversion Intensifies in Retirement
The Data
Losses feel 2–2.5x worse than gains
Older investors reduce risk after downturns
🧠 What This Means
Volatility feels more dangerous
⚠️ Behavioral Outcome
Panic selling
Over-allocation to cash
💡 Insights
Avoiding risk increases long-term failure risk
🛠️ Tools
Bucket strategy
Pre-commitment rules
📖 Anecdote
Retiree moves to cash after first downturn, misses recovery
The Retirement Spending Curve Is Real
The Data
Spending is highest early, declines, then rises with healthcare
~43% will incur ~$242K in long-term care costs
🧠 What This Means
Spending is not linear
⚠️ Behavioral Outcome
Underestimating early and late retirement costs
💡 Insights
Flat withdrawal assumptions are flawed
🛠️ Tools
Spending curve modeling
Healthcare planning
📖 Anecdote
Retiree overspends early, underprepared for later costs
The Data
Losses feel 2–2.5x worse than gains
Older investors reduce risk after downturns
🧠 What This Means
Volatility feels more dangerous
⚠️ Behavioral Outcome
Panic selling
Over-allocation to cash
💡 Insights
Avoiding risk increases long-term failure risk
🛠️ Tools
Bucket strategy
Pre-commitment rules
📖 Anecdote
Retiree moves to cash after first downturn, misses recovery
The Data
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Many retirees lack a clear income strategy
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Median net worth far below perceived needs
🧠 What This Means
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Plans don’t translate into behavior
⚠️ Behavioral Outcome
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Poor decisions despite good plans
💡 Insights
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Execution matters more than projections
🛠️ Tools
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Ongoing planning
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Behavioral coaching
📖 Anecdote
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Retiree with solid plan fails to follow it during volatility