According to MetLife’s “Paycheck or Pot of Gold” study released Wednesday, one in three retirees who take a lump sum from their defined contribution plan deplete that lump sum, on average, in 5 years.
That’s even more and even faster than what the same poll found five years earlier. In the 2017 study, one in five retirees had depleted their lump sum in 5.5 years, on average.
This is not good when most retirements these days last at least 20 years.
“With this new study, we wanted to see if the passage of time would translate into more retirees, who took a lump sum, being able to make their savings last,” the report’s authors state. “Unfortunately, today, the proportion of retirees depleting their lump sums is more pronounced—and they are depleting these lump sums much more quickly.”
Deciding if and when workers plan to retire is important but, the report notes, but for near-retirees, the “great retirement decision” is whether to take one’s accumulated savings as a paycheck (i.e., monthly annuity payments) or a perceived “pot of gold” (i.e., a lump sum)—or some combination of the two. This is arguably one of the most important decisions a person will make about their retirement and, in addition to how much they have saved, will largely dictate whether they can enjoy a secure retirement.
The new MetLife survey is heavily focused on promoting guaranteed lifetime income options, based on statistics highlighted in the report.
To wit, the study found nine in 10 retirees (89%) and pre-retirees (90%) feel it’s very important or absolutely essential to have a guaranteed monthly income to pay their bills. In fact, the new report also finds that more than half of pre-retirees (53%) think their employer should be required to provide an annuity option—particularly those pre-retirees who expect that they will opt for an annuity (57%, compared with 36% who plan to take a lump sum).
Among retirees who took the annuity, nine in 10 say their budget is more predictable, they are better off financially, they feel more financially secure, and it’s easier to pay for basic necessities.
The study also found:
• 90% of pre-retirees think it’s valuable to have guaranteed monthly income to pay their bills
• 89% of pre-retirees would like a partial annuity/partial lump sum option
• 82% of pre-retirees would pick the annuity over the lump sum if they had to choose
Women deplete lump sums faster
The study found more women (43%) than men (29%) have already depleted their lump sums in retirement—and they did so more quickly.
The study found more women (43%) than men (29%) have already depleted their lump sums in retirement—and they did so more quickly (4.5 years for women versus 5.6 years for men). Among those who took a lump sum, more women believe they would have been better off financially if they had the option to convert part or all of their DC plan account balance into an annuity (62% for women vs. 47% for men).
When it comes to concerns about depleting their lump sums, retired women who still have money remaining from their DC plan are much more concerned than their male counterparts (57% for women vs. 34% for men). Additionally, these women estimate their money will be depleted, on average, in 11 years compared to 20 years for men.
Over half of retirees overall (54%) have cut back on spending as a result of concerns about running out of money but this too is much more pronounced for women (74% women vs. 43% men). Among pre-retirees 35% of women vs. 28% of men believe they will have to delay their retirement.
Conclusions and considerations
The study concludes that by expanding access to guaranteed lifetime income solutions, employers can empower plan participants to confidently transition into retirement—and help ensure their retirement savings lasts.
Since their inception, DC plans have evolved in many ways—from the addition of automatic programs to encourage savings and target-date funds to make DC plan investing easier. However, one area where the study says DC plans have presumably not evolved quickly enough is enabling workers to convert their retirement assets to guaranteed retirement income.
“The retirement industry has made a tremendous effort in recent years to introduce lifetime income offerings, in the hopes that employers with Employee Retirement Income Security Act (ERISA)-based plans adopt these features,” the report states. “However, two years after policymakers made it easier for employers to strengthen and enhance their company’s DC plan with the addition of lifetime income, we are only now beginning to see greater interest and action on the part of employers to provide plan participants with these valuable options. It’s clear that there is more work to be done.”
The study’s authors recommend that plan sponsors:
• Conduct a strategic review of the plan’s ability to facilitate successful retirements.
• Expand access to guaranteed lifetime income solutions, and retain a consultant/advisor to conduct due diligence on the available solutions in the marketplace.
• Make retirement income education a priority, and provide access to decision-support tools such as calculators and illustrations to help employees predict their retirement income needs.
ACCESS THE FULL REPORT HERE.
SEE ALSO:
• How Income Solutions Help 401k Plan Participants, Sponsors, and Society
• 2021 Annuity Sales Highest Since 2008 (No Thanks to 401ks)
• The Value of Guaranteed Income In-Plan Solutions: GRPAA 2022 Industry Leaders Summit
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
