The Many Utilities of Retirement

Which brings us to lifecycle economics. If utility comes only from consuming goods, services and experiences, and the goal is to maximize utility, then the rational retiree seeks to spend all their money while alive. You’re penalized for every dollar unspent; bouncing the undertaker’s check is optional, but you should at least come close. (For purposes of this discussion, we assume the retiree has already set aside, explicitly or mentally, any planned bequests.)

RPIG versus FORO

Under lifecycle theory, dying with millions of dollars unspent — the Richest Person in the Graveyard (RPIG) — is a gross violation of the maxims of rational choice.

We beg to differ: Not everyone dreads RPIG. Many, in fact, worry about the opposite: fear of running out (FORO).

Here’s why: Let’s view utility as a ledger. The credit side is obvious — the familiar benefits of spending money — but it also has a debit side.

What’s on the debit side? Just ask retirees and pre-retirees what keeps them up at night. Amalgamated from multiple sources, in descending order of importance:

• Ill health;
• Health/long-term care costs;
• Running out of money;
• Inflation/loss of spending power;
• Insufficient savings; and
• Retiring with debt.

Five of the six items on this list translate as “fear of running out” (FORO). We believe that for many retirees, managing the debit side of the utility ledger provides more bang for the buck than goosing the credit (consumption) side. To sit on a large amount of never-spent dough enhances net utility by vanquishing items 2–6 above. Anecdotally, some of the happiest people we know operate this way and are not at all disturbed that they are prime candidates for that horrible fate… RPIG.

Put another way, for many, worrying about money produces industrial grade disutility. With enough money, it’s no worries, mate.

Equations = Bad

Economists love equations, and a good equation requires Greek letters. But as our late and dearly missed friend Jonathan Clements often reminded us, each equation cuts readership in half. After six or seven equations — a fairly low bar if we were academic economists — readership vanishes. So we decided to skip the equations and move right to a Greek letter. Given the focus of this piece on money late in life, we picked the last one in that alphabet: omega.

Omega quantifies how much you fear running short of money relative to how much you fear leaving money unspent. It scales between 0 and 1. The low-omega retiree cares most about living well through spending. A seat in business class gives a thrill. The affordability of that upgrade doesn’t concern him; in his mind, he has enough wealth to afford it today — and he may not be here tomorrow.

The high-omega retiree, on the other hand, is mortified at the thought of shrinking the nest egg by thousands of dollars for a few hours of extra luxury. Sure, upgrading to business class nicks only a small fraction of wealth today — but what about tomorrow? High-omega types can’t get past the aforementioned six angry horsemen of old age. The disutility of seeing wealth drop overwhelms the utility of consuming more goods, services, and experiences.

Omega determines the spending path that optimizes utility during retirement. Low-omega retirees who perceive themselves to have enough money spend freely, especially today, right now. The low-omega retiree does seek — to steal the title of Bill Perkins’ bestseller — to Die With Zero. The high-omega retiree, on the other hand, fears that vengeful market gods or personal misfortune might send them spiraling down a white-knuckle toboggan ride towards cat food and worse. The calendar always reads 1929. Dying with zero is a guess and a hope, a wish, not a plan.

At high omega, today’s spending matters less than money kept in hand. Utility flows from having surplus funds that will never be spent. RPIG holds no dread. You are alive every minute until you are dead, and the pleasure of having plenty of money endures right to the end.

Like any subjective preference, the extremes of omega are rare. Most affluent retirees fall somewhere in the middle, where holding onto more money versus spending more money is a wash. You deem yourself at equipoise between the two, and within limits, the one easily translates into the other. You might spend more if your investments go up or there’s a big wedding to celebrate. You might not spend much some years and instead let the money pile up. You get the same utility either way, since one is equivalent to the other.

Conventional Wisdom

Omega is a radical departure from conventional thinking about spending and money management in retirement. We think it’s an important, neglected concept that needs more attention from advisors.

Under conventional lifecycle theory, ruin is unacceptable. To run out of money before running out of life carries unlimited disutility. This is the only constraint on spending recognized in the classic tradition, which dictates that you haven’t maximized lifetime utility if you beavered away at spending down your wealth then came up short two years early. The disutility of ruin cancels whatever stream of utility you harvested from all that spending beforehand.

That was the original inspiration for William Bengen’s 4% rule: to avoid ruin by throttling spending back to a level that always succeeded in history (at least over a 30-year retirement). Alas, since you don’t know when you will die, and don’t know what your lifetime investment return will be (maybe you retired in 1929, or more fortunately, in 1982), the only sure way to avoid ruin is to underspend. In most of Bengen’s historical cases, withdrawing only 4% meant ending life with more money than you had when you retired — a thumb in the eye of Die With Zero.

Underspending while alive maximizes your odds of dying as RPIG. That, in conventional thinking, is also bad, because it buries vast amounts of utility along with you.

Consequently, the 4% rule has of late fallen out of favor. No fixed withdrawal rate can avoid the twin perils of ruin on the one hand, versus large sums of utility forfeited when the grim reaper calls.

Variable withdrawal schemes, many powered by the continuous re-estimation of life expectancy, are slowly replacing the 4% rule. These approaches promise simultaneously to avoid ruin while coming as close as practicable to meeting the die-with-zero standard. Ruin need never occur because annual withdrawals can be cut when low or negative market returns arrive.

Such systems also approach the die-with-zero standard, because withdrawals — now free of sequence-of-returns risk — can start high and with a little luck even rise as life expectancy contracts. Given reasonable longevity, you can expect to die with almost nothing, as your final year of spending exhausts almost all your remaining wealth.

This approach terrifies the high-omega retiree. To watch wealth melt away is torture. Life and death are adjacent in time. You can’t die broke unless you live your final years going broke.

The perceptive high-omega retiree favors underspending for another reason: They fear the hedonic treadmill. They’ve not only read about it but have experienced it firsthand. They know that the utility of each ratchet up in consumption fades over time.

Sure, the Fairmont might be more pleasurable than the Marriott — on the first stay. But getting that same increment of utility next year will require stepping up to the Four Seasons. And the next vacation, to the Ritz. Where does it stop?

Sooner or later, spending more — which in classical theory means converting wealth into utility — will shrink a fat nest egg. Which produces disutility for the high-omega retiree.

Problems Solved by Omega

Traditionally, people who willfully die with millions of dollars unspent are derided as misers. RPIG is a jibe, as in “you are pig.” Standard economic theory ignores that for some people, unspent wealth provides a utility all its own.

Omega explains why dying with millions may not be a tragedy, but something to exult over: “I never had to worry about money. I lived my entire retirement down to my last days in a state of wealth — which is not where I started out in life.”

Variable withdrawal methods make perfect sense for the low-omega person, who gets more utility from goods, services, and experiences than from retaining dollar wealth. But at high omegas, even the cleverest variable withdrawal techniques, which both maximize spending early in retirement and minimize wealth remaining at death, still lessen net lifetime utility as wealth slowly and inexorably circles the drain.

The implications for financial advisors with a newly retired client are straightforward. Go ahead and measure their risk tolerance. But also pay attention to how they feel about retaining wealth versus spending it down. Probe how they might react as they age into their 80s, if the recommended spending plan causes their net worth to erode like a sandcastle at high tide.

Be aware of high omega’s predisposing conditions: Starting out with massive student loans, or parents who lived through the Great Depression, or ancestors in living memory who were refugees. The more precarious their origins, the keener their perception of the many threats to wealth, the countless ways it can dwindle once they start adapting to higher spending.

RPIGs are sometimes scorned as people who love money more than life. Omega informs us how wrong that is. The high-omega person doesn’t love money so much as they fear penury. It’s easy for them to imagine how excess spending plus a few bad breaks could bring their happy financial edifice tumbling down.

The takeaway for financial planners: Many clients derive legitimate utility from never-to-be-spent dollar wealth, and experience disutility from a program of spending that steadily reduces wealth as retirement proceeds. They don’t want a spending path that takes their wealth anywhere near zero.

For some, a few million kept in Treasuries provides more lifetime utility than flying business class on vacation, to be met by a private driver who shuttles them to and from the Ritz.

Figure out who these clients are, and you can help them be happier with themselves — and with you as well.

Read more articles by Edward McQuarrie and William Bernstein here:

• To Delay or Not to Delay Social Security? That Is the Question
• The Peter Bernstein Rule: Beware Empty Memory Banks
• The Widow Tax Hit Debunked

Edward F. McQuarrie, Ph.D., is professor emeritus at Santa Clara University. He writes about financial history and its implications for retirement planning. His paper, “The 4% Rule Was Never Failproof,” won the 2026 Journal Research award from the Investments & Wealth Institute. Working papers describing his research can be downloaded here.

William J. Bernstein is a neurologist, the co-founder of Efficient Frontier Advisors, an investment management firm, and a writer with several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal. He has produced several finance titles, and four volumes of history, The Birth of Plenty, A Splendid Exchange, Masters of the Word, and The Delusions of Crowds about, respectively, the economic growth inflection of the early 19th century, the history of world trade, the effects of access to technology on human relations and politics, and financial and religious mass manias. He was also the 2017 winner of the James R. Vertin Award from the CFA Institute.

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