Many retirees spend retirement lump sums too quickly
April 14, 2017 by Marlene Y. Satter
Many retirees who take a lump sum rather than opting for a guaranteed monthly annuity could be asking for trouble — a new study finds that a substantial number of them spend those lump sums within just a few years of retirement.
That’s according to the MetLife Paycheck or Pot of Gold study, which finds that 21 percent of respondents who opted for a lump sum from a defined benefit or defined contribution plan say they’ve already spent it all.
Among that 21 percent who depleted their lump sum, the average time it took them to deplete the money was just five and a half years. And 35 percent of those who still have some of the money are worried that it will run out.
While 96 percent of retirement plan participants who chose an annuity from a DB or DC plan say they’re happy with their choice, the numbers aren’t all that different from DB plan participants who took lump sums (93 percent) or even DC participants who chose lump sums (85 percent).
But the lump-sum recipients seem to have more financial worries than the others.
Among the lump-sum crowd of both DB and DC plan participants, 52 percent admit that their budgets would be more predictable had they taken the annuity. Among those who did take the annuity, on the other hand, 91 percent feel they are financially secure and 95 percent say the annuity payments make budgeting more predictable.
In addition, 41 percent of those who took a lump sum from a DC plan instead of an annuity say they wouldn’t be worried about outliving their assets if they had chosen to annuitize, and 38 percent of those who took a lump sum from their DB plan say they wouldn’t be afraid of running out of money in retirement if they’d opted for annuity payments.
And when it comes to worry, 60 percent of annuity recipients think they worry less about outliving their money than their friends and neighbors who don’t have steady annuity income, while just 6 percent think they worry more.
So how did so many people run through so much money so fast? In a word, spending.
The study finds that 63 percent of individuals reported major purchases/spending within the first year. Nearly a third of them, however—31 percent—suffered buyer’s remorse, and 23 percent of those who gave money away also regret it.
Asked about specific regrets, a 54-year-old DC participant commented in the study that, “Once spent, [the money] will never be available for my future,” and a 66-year-old DC participant said, “I didn’t need the money then, but I need it now.”