As they approach retirement age, workers in the United States must make a choice that will dramatically affect their financial future. They must decide between taking a lump sum payment or a guaranteed monthly annuity from a defined contribution plan sponsored by their employer. While the idea of having a large sum of money all at once to invest or use as you wish has its appeal, taking retirement money as a lump sum could have disastrous results if the money isn’t handled well.
A recent 2022 study conducted by MetLife found that about one in three of the pre-retirees who took their money as a lump sum completely ran out of funds after five years. This is a much faster rate than previously seen. To compare, MetLife conducted this study in 2017 and found that only one in five retirees ran out of money after about five and a half years.
What’s the reason behind this trend? Let’s take a closer look at the study and the psychology behind why so many retirees who take lump sums end up burning through their funds within the first quarter of their post-work years.
In conjunction with the Harris Poll, MetLife set out to answer three questions about the “Great Retirement Decision.” Researchers wanted to know the following:
- Do retirees and those about to retire desire a monthly guaranteed retirement income?
- Are retirees’ expectations with taking a lump sum payment being met?
- How fast do retirees burn through their lump sum payments?
Nearly two thousand adults in the United States were interviewed between November and December 2021. The study included adults between the ages of 50 and 75 who were either retired or planning to retire within the next five years.
A report on the study states that while 89% of pre-retirees would prefer to receive their retirement money partially as monthly payments and partially as a lump sum, 82% of participants said they would rather take the monthly annuity if they had to choose just one option. That means only 18% of pre-retirees choose to take all of their retirement funds as a lump sum payment. The vast majority of participants agreed that having a guaranteed monthly income was important to them in order to cover necessities like utilities, car payments, and other monthly bills.
Many retirees who take lump sum payments seem disappointed overall with the outcome of their choice. In addition to the 34% of retirees who burn through their retirement funds in five years or fewer, 41% of those who still have money in their accounts express anxiety over that money running out. With the average lifespan of an American reaching about 79 years and the average retirement age being 62 for women and 64 for men, that means many people who take lump sum payments will end up feeling anxious about their financial futures for a period of at least fifteen years.
Surprised by their findings, researchers in the study were inspired to take a closer look at where retirees who blew through their retirement funds were spending all that money. The answer hints at deeper trends and commonalities between retirees who are attracted to the idea of lump sum payments versus smaller monthly annuities.
Out of those who participated in the study, over three-quarters (79%) who depleted their entire lump sums within five years made at least one big-ticket purchase. These purchases often included luxury items such as cars, expensive vacations, and new or second homes. This trend has grown since the 2017 survey, when only 64% of lump sum retirees made similar purchases.
Despite these concerning trends, the majority of lump sum recipients don’t seem to regret their decision, although the numbers are close. About 46% of respondents said they regretted the lump sum decision and wished they had chosen to receive monthly payments instead.
As for the participants in the survey who chose a guaranteed monthly annuity rather than a lump sum, nearly all of them (96%) claim to be satisfied with their choice. 95% of these retirees say that receiving guaranteed monthly payments makes them feel financially stable, and 97% say they use their monthly annuities to cover recurring monthly expenses like bills, mortgages, and car payments.
Financial advisers and annuity experts hope that the passage of the SECURE Act will help employers feel more comfortable offering mixed retirement plans that include some form of guaranteed monthly payment, which in turn will help retirees make their money last and secure their financial futures.
MetLife is a global leader in financial services, offering insurance, annuities, employee benefits, and asset management to individuals and institutions alike. MetLife was founded in 1868, and its many subsidiaries and affiliates operate in more than 40 markets around the world.
One of the longest-running surveys in the United States, the Harris Poll has been tracking public opinion and social trends since 1963. Harris is a worldwide market research and consulting firm with a focus on social intelligence. Among the services offered by the Harris team are corporate reputation management, brand strategy solutions, performance tracking, and public relations research.
Human beings historically respond positively to having multiple options, which could help explain why some retirees would rather have full control over the total sum of their retirement money instead of waiting for it to be doled out month by month. However, the dangers inherent in receiving lump sum retirement payments are made clear in this study, given that more than a third of retirees manage to spend their entire retirement within five years. It remains to be seen whether this trend will continue, or whether legislation such as the SECURE Act will succeed in providing retirees with more attractive and varied retirement options than strictly lump sums or monthly annuities.
Note: This information is provided as an info service only and should not be used to make any financial decision. Annuity Associates does not have a relationship with MetLife or any other insurance carriers for that matter. Annuity Associates helps consumers by striving to provide correct information to help them make educated decisions about annuities. Annuity Associates can connect interested consumers with a financial professional, if requested.