For decades, most people are conditioned to work hard, save, invest, and keep building.
But for those who are already on track financially, the bigger question is not how to accumulate more wealth, it is how to avoid wasting the years when that wealth is most valuable. Knowing when to ease back, and how to do it safely, may be one of the most important financial decisions of all.
Don’t risk running out of healthy years!
Much of the financial planning content out there, including my own, focuses on avoiding financial failure. Poor investment returns, running out of money in retirement, covering aged care costs, and preserving purchasing power against inflation tend to dominate the conversation.
These are all important issues, and for most Australians they deserve to be high on the list. But for those who are already in a strong financial position or are likely to be by the time they retire, a different risk becomes more important: underspending in the early years of retirement, when health, energy and freedom are still on their side.
For many people, the real fear is not running out of money. It is looking back and wishing they had done more when they had the chance. In retirement, wealth may still be abundant, but energy often is not.
A helpful way to think about retirement is in two phases.
The first is the high-health phase, which may cover the first 10 to 15 years after finishing work. These are typically the years when people are more mobile, social, adventurous, and capable of making the most of travel, experiences, and greater freedom.
The second is the lower-health phase. During this stage, spending often declines, not because money is less available, but because priorities shift. Expenditure is more likely to be directed towards convenience, support, and care, rather than travel, adventure, and lifestyle experiences.
For many, the ideal outcome is clarity. They want to know how much they can safely spend each year in phase one, while still being confident they will have more than enough left to fund a comfortable phase two.
Why spending your wealth is part of a good plan
For decades, most of us are conditioned to focus on accumulation. We work hard, save consistently, reduce debt, make long-term investment decisions, and let compounding do the heavy lifting over time.
But retirement, particularly when the plan involves drawing down on wealth, requires a very different mindset. If the goal is to make the most of the high-health phase of retirement, the shift from accumulation to decumulation is not just financial. It is psychological.
During our working years, the focus is usually on building wealth. In retirement, the focus shifts to planning how that wealth will be used. That means forecasting future spending, thinking carefully about lifestyle goals, and working out how to draw on assets in a sustainable way.
If the strategy involves spending capital, there are several things to manage well. These include sequencing risk, taxation, and maintaining enough liquidity to fund lifestyle goals without holding so much cash that long-term returns are unnecessarily compromised.
I think this transition becomes much easier when it is acknowledged from the outset. If you know that your working life is about building as much wealth as possible, then retirement becomes the phase where those assets are there to support your freedom, choices, and experiences. When viewed that way, the move into decumulation feels less like a loss and more like the natural reward for decades of discipline.
For most people, the purpose of investing is not simply to accumulate wealth for its own sake. It is to create future security and lifestyle choices. Yes, many people would like to leave something behind for their beneficiaries and do not want to die with zero. But there is little point in preserving too much at the expense of living well when you are most able to enjoy it.
For some, that means accepting that a period of deliberate decumulation is not a failure of the plan. It is the plan.
Retirement confidence comes from guardrails, not perfect numbers
Let’s face it, no one wants unnecessary financial uncertainty in retirement. In fact, most people want more certainty once they stop working, because they may not be willing, or able, to return to work if things do not go to plan. That means making the most of the wealth they have already accumulated.
The common misconception is that retirement planning is about finding a precise number that defines the absolute maximum you can spend in the early years. In reality, good planning is rarely that exact. It is about working within probabilities, understanding reasonable spending ranges, and putting sensible guardrails in place.
A practical way to think about this is to divide your wealth into three categories.
- The minimum capital needed to fund a comfortable lifestyle. These are your core assets. They need to be protected and invested prudently because they underpin your long-term financial security.
- Second, there is contingency capital. This is money set aside to deal with uncertainty, such as poor market conditions, health issues or future aged care costs.
- Third, there is discretionary capital. This is the pool of wealth that can be used more freely, whether that means enjoying the high-health phase of retirement, helping family, or making donations.
This framework helps bring clarity to an otherwise uncertain decision. It shows what capital is effectively sacred and should be preserved, and what surplus financial capacity is genuinely available for more discretionary choices.
Being wealthy is not the same as being financially flexible
One challenge for some retirees is that a large portion of their wealth may be tied up in lumpy, high-value assets such as direct property, unlisted investments, and businesses. In these cases, people can be asset rich but cash-flow poor, which makes it harder to fund lifestyle choices.
Ideally, this can be addressed well before retirement through careful planning. But in practice, if the goal is to use surplus capital for more travel, gifting or greater flexibility, there may need to be a deliberate shift away from less liquid assets and towards more liquid ones.
In other words, net wealth alone is not the answer. What matters is the type of assets you own, their liquidity, their efficiency, and the extent to which unrealised tax liabilities are attached to them. These factors will often determine how much financial flexibility you actually have. Again, this is as much a psychological transition as it is a financial one.
Throughout our working lives, many people adopt the mindset of buying quality property and assets, holding it long term, and never selling, so they can benefit from compounding capital growth. That thinking is entirely right during the accumulation years.
But in retirement, the equation often changes. If someone is choosing between holding a property or selling it to fund more travel and experiences, selling can feel like the wrong move or even a failure. In reality, it may be exactly the opposite.
The reason we invest in property when we are younger is that it can be highly effective for building wealth. It is tax efficient, as much of the return comes through capital growth, and leverage can magnify the outcome.
The reason we may sell property and unlisted assets in retirement is that it has already done its job. It helped build wealth efficiently. But if it now limits liquidity and prevents us from using that wealth in ways that support our lifestyle goals, then continuing to hold it may no longer make sense.
That is not a failure. It is a thoughtful and financially astute decision that reflects a new phase of life.
Sometimes the problem is not too little wealth, but too much caution
Apart from holding the wrong mix of assets, another mistake investors can make is becoming too defensive in retirement. That can show up in several ways.
Sometimes it means working an extra couple of years because it feels safer when there may already be more than enough wealth to retire comfortably.
Other times it shows up as continuing to be overly conservative with spending which is unnecessary. That may sound like an odd thing to say. It is not my role to judge whether someone is spending enough. But psychologically, the shift from saving and investing to spending and enjoying accumulated wealth is not always easy.
For decades, the focus has been on discipline, restraint, and delayed gratification. Retirement often calls for a different mindset, one where spending money on experiences, enjoyment or gifting can be entirely appropriate and deeply rewarding. In many cases, the real challenge is giving ourselves permission to use the capital we worked so hard to build.
A similar issue often arises for self-employed people. One common mistake is having too much wealth tied up in the business itself. Another is remaining overly focused on extracting maximum value from the business, even when enough personal wealth already exists outside it.
The first problem usually reflects a lack of strategic planning around succession, reducing capital tied up in the business and ultimately realising its value. As a general observation, most business owners leave succession planning far too late. In my view, the cost of starting too early is negligible, while the cost of leaving it too late can be significant. In most cases, it is far better to move too early than too late.
The second issue is more subtle. A business owner may already have sufficient personal wealth to fund their desired lifestyle yet remain focused on extracting more value from the business. That instinct is understandable. After spending years, or even decades, building a business, no one wants to walk away lightly. But the trade-off can be substantial. The cost of continuing to work may be sacrificing much of the high-health phase of retirement.
Both mistakes are avoidable. With proactive planning and sound business advice, it is possible to create more flexibility, realise value more strategically and make better use of the years that matter most.
Why your estate plan shapes how confidently you can spend
If you go into retirement without giving some thought to the size of estate you would like to leave behind, there is a good chance you will underspend and, in doing so, forgo lifestyle opportunities you could have comfortably afforded.
Of course, the biggest unknown is life expectancy. No plan can be exact. But that does not make planning any less valuable, particularly for people who are likely to retire with surplus investment assets.
A practical way to approach this is through three steps.
Step one is to estimate how much you will want to spend in retirement to support the lifestyle you want – a very comfortable lifestyle. That should include a base level of living expenses, along with discretionary spending such as travel and leisure. It may also be sensible to assume spending falls by 20%-30% from around age 80, reflecting the reality that many people spend less during the lower-health phase of retirement.
Step two is to estimate how much capital is needed to support that level of spending. This should be based on conservative return assumptions. Depending on the circumstances, that may mean assuming long-term returns of around 6% to 7%, including inflation. It is also useful to test the model by changing assumptions around asset allocation and sequencing risk, so you can see how the strategy may hold up during periods of market volatility.
The final step is that once that work is done, you can identify how much capital forms part of your core retirement strategy and therefore needs to be invested prudently. Any capital above that amount may be treated as surplus and used more deliberately to enhance the high-health phase of retirement or quarantine to leave to beneficiaries.
This type of exercise can also help determine whether retiring earlier is financially realistic.
One important caution: financial modelling is only as good as the assumptions behind it and the quality of the model itself. These are significant decisions, and poor assumptions can lead to poor outcomes. For most people, it makes sense to have these projections prepared properly by a professional.
Retirement does not have to be all or nothing
Thinking carefully about how you want to use your wealth in retirement, whether that involves spending capital or preserving it, can be one of the most important and rewarding parts of the planning process. Done well, it can also help avoid regret later in life.
That does not mean the answer is always to retire tomorrow or suddenly start spending much more. For many people, the right decision is more nuanced. It may mean reducing work gradually, stepping away from new responsibilities, or creating more space to enjoy life while remaining engaged in some capacity.
For others, it may involve progressively selling down a business and reinvesting that equity into other assets.
It may mean shifting into a different type of work that feels more meaningful and better aligned with this next stage of life.
And for those who are already retired, it may simply provide the confidence to start living more fully and making the most of the freedom they have earned.
Much of what I usually write about is practical and technical. But this psychological transition may be even more important than many of those decisions, because of the impact it can have on the quality of people’s lives.
