It’s a question vexing every lottery jackpot winner—lump sum payment or guaranteed monthly income stream?
And now it’s a decision increasingly facing many soon-to-be retirees with 401k plans. While a lump sum may be attractive to some, there could be significant drawbacks according to MetLife’s “Paycheck or Pot of Gold” study.
It found one in five retirement plan participants who selected a lump sum from a defined contribution plan say they depleted it. Of those who depleted their lump sum, they had run through their money, on average, in five and a half years. One in three with money remaining are concerned about the money running out.
A Choice with Lifelong Implications
Nearly all retirement plan participants who chose an annuitized payment from a defined benefit or defined contribution plan (96 percent) were happy with their choice.
Similarly, the majority of participants who took a lump sum say they are glad they made the choice they did (85 percent for defined contribution lump sum recipients). However, the lump sum recipients appear to have had more financial concerns.
More than half of participants who chose a lump sum concede that, if they would have taken the annuity, their budget would be more predictable. In contrast, most participants who selected an annuity feel they are financially secure (91 percent), and that the annuity payments make budgeting more predictable (95 percent).
In addition, four in ten participants who chose a lump sum from their DC plan over an annuity say that they would not be concerned with outliving their assets if they had chosen to annuitize. Sixty percent of annuity recipients believe they worry less about outliving their money than their friends and neighbors without steady income from an annuity, while a paltry 6 percent believe they worry more.
Spending Habits
When it came to spending their lump sums, the study found 63 percent of individuals reported that they had major purchases/spending within the first year.
But these decisions were not without remorse—the study found that nearly one-third of those who made major purchases/spending in the first year say they have regrets about the spending and almost a quarter (of those who gave money away regret doing so).
When asked about specific regrets, a 54-year-old defined contribution participant commented that, “Once spent, [the money] will never be available for my future,” and a 66-year-old participant said, “I didn’t need the money then, but I need it now.”
“When an individual receives a lump sum, it is often more money than they have ever had at one time,” Robin Lenna, executive vice president and head of Retirement and Income Solutions at MetLife, said in a statement. “As a result, it is easy to underestimate how quickly it can be depleted. Guaranteed income from annuities can help participants plan their spending, ensuring there is enough money available when they need it.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
