A third (34 per cent) of U.S. retirees who took a lump sum from their defined contribution pension plan in retirement depleted that sum within an average of five years, according to a new survey by MetLife Inc.
“There can be significant drawbacks for retirees when taking a lump sum,” said Melissa Moore, senior vice-president and head of annuities at MetLife, in a press release. “With the average American living 20 years or more in retirement, longer than previous generations, this can leave them at risk of depleting their money too quickly and needing to fund a significant portion of their retirement years with no income other than social security.”
The survey also found 41 per cent of respondents expressed anxiety about their money running out in retirement. In particular, more than half (57 per cent) of women are concerned about depleting their lump sums, compared to a third (34 per cent) of men. More women have also already depleted their lump sums in retirement, with 43 per cent of women having done so, compared to 29 per cent of men.
For those who selected a lump sum at retirement, more than three-quarters (79 per cent) made at least one major purchase within the first year of withdrawing money. Among all lump-sum recipients, just under half (46 per cent) expressed at least some regret about withdrawing money from their DC plan.
In comparison, nearly all (97 per cent) retirees who bought an annuity used their DC plan money for some type of ongoing expense and 94 per cent agreed that receiving annuity payments makes it easier for them to pay for basic necessities. With that group, 95 per cent said receiving monthly annuity payments makes them feel financially secure. Indeed, virtually all (96 per cent) annuity-only recipients are happy they chose to receive a retirement paycheque from their DC plan.
“Most retirees didn’t have the option of taking a partial lump sum/partial annuity,” said Roberta Rafaloff, vice-president of institutional income annuities at MetLife, in the release. “Looking ahead, as employers feel more comfortable offering income annuities to retiring workers following the annuity selection guidance included in the SECURE Act, pre-retirees may have more options to make their money last.”
Ninety per cent of pre-retirees said it’s valuable to have a guaranteed monthly income in retirement to pay their bills. Nine in 10 (89 per cent) also said they’re interested in an option that would allow them to have both a monthly retirement paycheque that would last as long as they (or their spouse/partner) live and access to a lump sum of their retirement savings to spend however they want.
However, if they had to choose one or the other, pre-retirees were far more likely to opt for the annuity (82 per cent) over a lump sum that would give them all of their retirement savings at one time but could potentially run out (18 per cent).