How Income Floors Save Retirees From Underspending

Given the common fear of outliving retirement savings, retirees often cope by underspending their liquid savings during retirement.

This behavior has typically been instilled during working years, when workers are often trained to be “diligent savers” for the future, according to David Blanchett, head of retirement research at Prudential Financial. In retirement, however, they are expected to do the exact opposite, Blanchett says, but the habit of diligently saving is not so easy to kick.

“We train people to be ants,” Blanchett says. “We show them their balance on their quarterly statement, every quarter, for 40 years. … All of a sudden, [during retirement,] they’re supposed to be grasshoppers.”

Of course, retirees should not be blindly drawing down their savings without a plan—rather, advisers can guide clients to establish an income floor. Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania, wrote in an email to PLANADVISER that an income floor enables retirees to reduce common fears about retirement savings.

“When essential expenses are covered by income that does not fluctuate with markets or longevity, retirees feel more comfortable using their remaining savings for discretionary spending,” Mitchell wrote.

Spending Concerns

In a survey conducted in November 2025, Alvarez & Marsal Financial Services found that a majority of retirement plan participants aged 40 to 60 reported feeling extremely anxious about retirement, rating their anxiety of outliving retirement saving at an average of 4.29 on a scale of 1 to 5, according to the Alavarez & Marsal report, “In-Plan Annuities: Meeting the Demand for Guaranteed Retirement Income.”

“The general sentiment is that people don’t generally understand retirement income and savings,” says Tamseel Butt, a managing director at Alvarez & Marsal. “Our survey highlighted that 60% of the people who participate in retirement income benefits [say] the most important factor is having enough money at the end of their retirement.”

Additionally, Butt says people are very concerned that the “three-legged stool” of retirement income—Social Security, pensions and personal savings—is destabilizing.

This traditional model has been challenged by the decline in pensions, with only 14% of the workforce using pensions as of September 2025, according to the U.S Bureau of Labor Statistics. Social Security’s trust funds are currently expected to be depleted by 2034 and, without correctional action from Congress, will only have only enough revenue to pay 81% of benefits.

Clients also share concern about market volatility. Once prospective retirees begin to see the market decline as they inch closer to retirement, panic often settles in.

“As [clients] near retirement, they become increasingly sensitive to market volatility,” Blanchett says. “The market goes down a bunch, [and they say,] ‘I can’t retire.’ So, you start to worry about things. … That same mindset … carries into retirement.”

Building an Income Floor

Typically, retirees do not fully understand the harm in underspending. Underspending despite holding ample savings during retirement meaningfully reduces retirees’ quality of life, according to Mitchell.

It is common for retirees to still be unaware of different products offering guaranteed “income” in the form of payouts from their savings, says Butt, but advisers can offer some perspective.

“Advisers can help clients overcome underspending by converting savings into reliable income through tools like annuities and by stress-testing the plan so retirees understand how much they can spend safely,” Mitchell wrote. “Advisers who explain the real-life costs of underconsumption can often shift clients from excessive caution toward confident, purposeful retirement spending.”

As the behavioral hurdle of underspending persists, advisers will need to strategize and refine their approach to income floors. Mitchell recommends educating clients about longevity risk, which she said is likely to increase their appreciation of lifetime income.

“This education can also motivate clients to delay claiming Social Security until age 70 … to secure higher inflation-indexed benefits,” Mitchell wrote. “Together, these steps can help clients recognize the value of establishing reliable income floors.”

Sources of Income

Advisers helping clients establish an income floor can start with understanding the retirees’ essential expenses and how much is needed to cover them. Blanchett says those expenses should be paid for by an income source expected to remain consistent throughout retirement.

After identifying the expenses, different sources of income—such as Social Security and annuities—can be introduced to create a stable base of income from which retirees can draw, according to Mitchell.

Along with identifying sources of income, Butt says advisers should create a clear image of which sources will be used for what and continue using a 4% withdrawal rule as a baseline. In this strategy, retirees withdraw 4% of their retirement savings annually, adjusted for inflation, to make sure their retirement savings last at least 30 years—and to minimize the chance of outliving savings.

“This protection can ease the anxiety that leads many people to underspend, allowing them to enjoy a higher quality of life while maintaining confidence in their long-term financial stability,” Mitchell wrote.

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