CPD: Permission to spend – why having enough isn’t enough in retirement

What are the psychological mechanisms that lead retirees to treat income and capital differently?

The retirement spending puzzle

In 2014, US researcher David Blanchett coined the term ‘retirement spending smile’^[1], a concept that has since become embedded in mainstream retirement incomes thinking around the world. The spending smile derives its name from the ‘U-shape’ curve that emerges when retiree spending is plotted against age – the simplistic explanation being that spending peaks in the early years, trends down in the middle years, and then ticks back up in later life as health costs rise.

More recently, however, experts who agree with the decline part of the smile are starting to question the evidence around the uptick. One of those experts is Blanchett himself. His fresh research^[2] – ‘How Spending Evolves in Retirement: A Smile, a Smirk, or Something Else?’ – has raised the possibility that the later-life uptick may be less pronounced in countries with state-funded health and aged care systems such as Australia. The smile, in other words, may look more like a smirk here.

Australian evidence from a range of sources supports this downward spending trajectory. Milliman estimated^[3] that the median retired couple’s expenditure falls by more than one-third (36.7%) as they move from their peak spending years in early retirement (65 to 69) into older age (85 and beyond), with the decline accelerating sharply once retirees pass 80. The Grattan Institute’s analysis^[4] of ABS household expenditure and bank transaction data covering more than 300,000 Australian retirees found no evidence of a late-life uptick either, with spending slowing from around age 70 and falling rapidly after 80.

But while the evidence around declining spending seems substantial, the more pertinent question is perhaps not whether retirees spend less as they age, but whether they are spending less than they safely could. This article will set out to investigate and explain that paradox, and the ways advisers can respond.

Having enough and feeling able to spend are different things

Part of the answer to the question lies in a distinction that’s easy to state but harder to act on – preparedness and confidence are not the same thing.

Retiree preparedness reflects readiness, and is steeped in functional dimensions of retirement:

• Am I financially prepared?
• Do I have a documented plan?

Confidence, on the other hand, is an emotional dimension:

• Am I confident that I won’t outlive my savings?
• Am I confident enough to spend?
• Am I confident enough to make the big decisions often required in retirement, such as downsizing or committing capital?

Blanchett’s 2026 analysis^[5] applies the ‘funded ratio’ – a metric borrowed from pension-plan analysis – to quantify these dimensions. A funded ratio of 1.0 means a retiree has exactly the amount of assets required to fully fund all projected future spending needs, while a ratio above 1.0 means they already have enough to sustain current spending indefinitely, without cutting back.  Blanchett’s study of a cross-section of retirees found those at the 1 – 1.49 funding ratio still cut real spending by 3.1% a year, and even those with a ratio of 1.5 –1.99 cut back by 1.2% a year. Only once assets reached double what was actually needed (a ratio of 2.0 and over) did spending see any growth, and even then, by just 1.1% a year in real terms.

In other words, retirees with no financial need for caution keep behaving cautiously anyway.

This is the well-resourced but under-confident retiree familiar to most advisers – financially capable of spending more, but not psychologically able to. While a well-constructed financial plan can optimise preparedness, it doesn’t solve for confidence. In fact, confidence is actually a critical input into the retirement planning process, rather than simply an outcome of it.

This isn’t just an academic problem, nor one for advisers to solve alone. ASIC and APRA’s 2025 Pulse Check on the Retirement Income Covenant^[6] found many trustees still lag in helping members engage with drawdown decisions, and Treasury’s newly released Best Practice Principles for retirement income solutions^[7] now explicitly call on trustees to engage members so they can make informed decisions, not simply to design compliant products. The regulatory focus is broadening beyond product adequacy to how effectively members are supported to make retirement income decisions.

But if the gap isn’t a financial one, what is it?

Part of the answer to this question lies in how retirees mentally sort their own money, and how they treat income and capital quite differently.

Why $1 of income doesn’t feel like $1 of capital

In the rational world of economic theory, a dollar is a dollar, regardless of where it came from or what account it sits in. But this doesn’t reflect our real-world attitudes to money. The behavioural concept of ‘mental accounting’ describes how people assign money to separate mental accounts (for example, savings, income, windfalls, ‘fun money’) and apply different rules of spending discipline to each, even though the underlying dollars are interchangeable.

A growing body of retirement income research suggests this mental sorting of money is a key driver of observed retiree behaviours around the world. Blanchett and Finke’s 2025 research^[8], tracking how US retirees actually fund their spending, found that around 85% of available lifetime income – including pensions, annuities and Social Security retirement payments – gets spent each year, compared with only about half of wages and capital income. Spending from savings is lower again: withdrawal rates for 65-year-old couples averaged just 2%, around half the commonly cited 4% rule.

Put simply, retirees readily spend money that arrives as income, but when it comes to capital they tend to hold back, and spending requires a conscious decision to draw down. In other words, a regular payment gets treated as something to use, while a balance in an account gets treated as something to protect.

There is an often-overlooked implication of this phenomenon.

The legislated minimum drawdown, intended purely as a prudential floor, may itself function as a mental-accounting cue, signalling ‘the right amount to take’, rather than a regulatory minimum. Recent Australian research into decumulation decisions^[9] points to exactly this kind of anchoring effect, and Grattan’s previously mentioned Simpler Super research found around one in five retirees drawing the minimum from their Account Based Pensions falsely believe this figure is what the government recommends. If a government-set number can anchor spending downward regardless of what a client’s actual resources support, the framing of a figure matters as much as the figure itself.

For advisers, the practical takeaway isn’t to make clients suspicious of their own instincts. Mental accounting is, after all, a normal human way of managing money. The takeaway is that the form a dollar of retirement income takes – income versus capital – can change whether a client is willing to spend it, regardless of whether they can actually afford to.

The framing effect

The framing of how retirement savings are accessed is clearly important, and a well-known piece of US research^[10] tested the importance of this directly. Presented with a choice between a life annuity and a savings account, 72% of respondents to the study by Brown et al preferred the annuity when the choice was framed in terms of consumption – what the product would let them spend each month. Preference for the same annuity dropped to just 21% when the same choice was framed in terms of investment – its risk and return characteristics relative to the savings account.

In this experiment, the products didn’t change, but the framing did.

The orthodoxy of compliant advice in Australia means that most retirement planning conversations default heavily to investment-based framing: balances, returns, risk tolerances. Through this lens, converting capital into guaranteed income can look unattractive, as it typically means handing over a large amount of savings in exchange for reduced access and uncertain returns. The consumption frame asks a different question entirely: what will this guaranteed income stream actually let me spend, with certainty, for the rest of my life?

This isn’t to suggest advisers downplay the access implications of income stream decisions (many newer guaranteed income solutions offer far more flexibility and access anyway). Rather, advisers should present both dimensions deliberately, so clients understand the consumption purpose of a capital allocation as clearly as they understand its balance-sheet effect. A client shown only what they’re giving up will evaluate a decision differently to a client shown both what they’re giving up and what they’re gaining, even when the numbers are identical.

From sustainable withdrawals to sustainable income

Most retirement income modelling is built to answer one question: what withdrawal rate can this portfolio sustain? While this is clearly an important calculation, we have already seen that this number in itself doesn’t build confidence to spend.

A spreadsheet showing a client can withdraw $70,000 a year doesn’t automatically create the confidence to spend $70,000 a year, particularly when that $70,000 comes from a capital base the client is watching ‘shrink’ in real time.

Building genuine spending confidence requires the adviser to go further than the sustainability calculation, and consider:

• How much of a client’s expenditure is essential versus discretionary
• Which income sources the client regards as genuinely dependable
• Whether actual spending is persistently falling below planned spending
• Whether balance declines, rather than income adequacy, are the trigger for a client’s anxiety
• Whether the client needs an explicit spending rule or income floor, rather than a withdrawal range, to feel able to act

Creating permission to spend

There are several practical ways for advisers to create more confident retiree clients:

• Treat confidence as an objective rather than an outcome
  Specifically talk about it during discovery meetings. Ask the client how confident they feel on a scale of 1 to 10. Ask them again from time to time and track the progress. At review time, check spending patterns for signs of excessive caution, and ‘unleash the shackles’ if necessary.
• Shift the conversation from balances to income
  Loss aversion is triggered when balances fall, so reframe performance around long-term income projections rather than portfolio value. Bucketing strategies reinforce this, as clients feel less exposed when they know near-term needs are secured, and will be more willing to hold growth assets with the remainder.
• Review actual spending against planned spending
  A client persistently underspending their plan is showing you a confidence problem, not a preparedness problem, and the two need different responses.
• Use reviews to renew spending permission
  CFS research^[11] found 77% of advised retirees are currently enjoying retirement, compared with 52% of those who have never received advice. This speaks not just to your role in providing a framework and progress updates, but your role as a confidence coach. Telling your clients ‘You’re on track, take that holiday’ provides a priceless confidence boost that even the best investment performance can’t deliver.

While none of these actions replace sound modelling, they do need to sit alongside it. A technically optimal plan a client won’t act on will always deliver a sub-optimal outcome, regardless of how good the modelling is.

Income layering: changing both the economics and the psychology

Guaranteed income solutions are usually pitched on their economics: reducing longevity risk and providing certainty against market downturns. But while both are true, the mental accounting research referenced earlier sets up a more powerful framing.

If retirees spend income far more readily than they spend capital, then converting more of a client’s retirement savings into a guaranteed income stream should create more permission, and more confidence, to spend.

The obstacle has traditionally been the belief that securing guaranteed income means giving up flexibility and access. Traditional annuities may offer certainty, but that certainty typically comes at the cost of the liquidity and control that irreversibility-averse clients are reluctant to surrender. Account-based pensions, on the other hand, offer flexibility but no certainty, leaving clients to effectively self-insure against longevity risk by spending more cautiously than required.

Income layering strategies tackle this conundrum head on, by treating guaranteed income as just one layer within a broader strategy, effectively allowing clients to ‘diversify’ the amount of commitment they are required to give. A new breed of retirement income products, for example AGILE from Allianz Retire+, is built for exactly this scenario, allowing clients to calibrate how much of their income they choose to guarantee while retaining flexible access to capital if circumstances change.

Rather than forcing a choice between certainty and control, this approach secures the retirement clients can’t yet see (Chapter Two), so they don’t need to second-guess the one they can (Chapter One)^[12].

From capacity to confidence

Retirement income advice has traditionally devoted enormous attention to the question of how much clients can safely spend. The evidence explored in this article suggests advisers need to pay equal attention to whether clients will actually feel comfortable spending it.

That means recognising that a technically sustainable level of expenditure may still feel unsafe to a client watching their capital decline, and that the way retirement resources are structured and presented can influence behaviour just as surely as investment returns or withdrawal rates.

For advisers, the opportunity is to bridge that gap. By identifying signs of unnecessary caution, framing retirement resources around the income and lifestyle they can support, and combining dependable income with sufficient flexibility, advisers can help turn financial capacity into spending confidence.

After all, a successful retirement plan isn’t only built to ensure a client’s money lasts, it’s also built to give them the confidence to spend that money while they can.

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References:
[1] https://www.financialplanningassociation.org/sites/default/files/2020-09/MAY14%20JFP%20Blanchett_0.pdf
[2] https://onlinelibrary.wiley.com/doi/10.1002/cfp2.70032
[3] https://au.milliman.com/en/insight/analysis-retirees-spending-falls-faster-than-expected-into-old-age
[4] https://grattan.edu.au/report/money-in-retirement/
[5] https://onlinelibrary.wiley.com/doi/10.1002/cfp2.70032
[6] https://www.apra.gov.au/news-and-publications/pulse-check-retirement-income-covenant-implementation-2025-industry-update
[7] https://treasury.gov.au/publication/p2026-743986
[8] https://onlinelibrary.wiley.com/doi/full/10.1002/cfp2.70010
[9] https://www.sciencedirect.com/science/article/pii/S2214635025000942?via%3Dihub
[10] https://www.aeaweb.org/articles?id=10.1257%2Faer.98.2.304
[11] https://www.cfs.com.au/about-us/media/cfs-research-finds-attitudes-towards-retirement
[12] https://www.allianzretireplus.com.au/campaign/the_two_chapter_retirement1.html

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at August 2026 unless otherwise specified and is for general information purposes only. It is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. Before acting on anything contained in this material, you should speak to your financial adviser and consider the appropriateness of the information received, having regard to your objectives, financial situation, and needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.