A growing number of employers are offering workers the option of annuitizing some or all of their workplace retirement savings, as opposed to taking it in one lump sum. While the lump sum option has its advantages, we believe many investors would be better served by choosing to annuitize.
Consider a recent Harris Poll study commissioned by MetLife. According to the study, 1 in 5 individuals who took a lump sum either from a defined benefit plan or a defined contribution plan depleted their lump sum, on average, in 5½ years. Retirees who had only a defined contribution plan and were not also receiving separate defined benefit pension income depleted the money even quicker.
When people come into a large sum of money, there’s a natural tendency to spend it quickly. However, this increases the likelihood of their money running out during their lifetime. Remember, people are living longer today, and it’s conceivable your retirement can last 30 years or more. In most cases, income from Social Security won’t be enough to live comfortably on over such a long period. If you deplete your workplace retirement assets too quickly, you could be setting yourself up for financial trouble at a time when you may no longer be able to work.
Even if you think you have a level head when it comes to spending, our experience shows people feel incredibly tempted to spend money when they receive a large sum at one time. Indeed, 63 percent of retirees who took a lump sum distribution, said they made major purchases within the first year, according to the MetLife study. During the first year, thirty percent used the money for expenses or debt and nearly a quarter gave away a hefty chunk of money to family, friends or to charity. Notably, many later had pings of regret over their spending decisions, the study found. Indeed, nearly one-third expressed regrets about major spending in the first year and nearly a quarter of those who gave money away were sorry they had done so.
Once you use a large chunk of money, it’s very hard, if not impossible, to replace that income in a short period of time, even with prudent investing. Although taking your retirement monies as a lump sum generally gives you more control over your money, there are real dangers if you are not extremely disciplined when it comes to spending and investing. It’s very telling that 41 percent of those who had the option to annuitize and instead took a withdrawal from their defined contribution plans say they would not be concerned with outliving their assets if they had chosen instead to annuitize. By contrast, nearly all of those who took an annuity were happy they chose this option as opposed to taking a lump sum, the survey found.
Certainly annuitizing isn’t right for everyone and not every employer offers the option. But if you do have a choice, we urge you to carefully weigh the pros and cons of each option so you understand the potential ramifications of each.
At Anderson Retirement Solutions, we can help advise you on your retirement needs and help you make choices that are the most appropriate for your financial situation. Please don’t hesitate to contact us at 888.473.6931 to discuss the various options and how they fit into your overall retirement plan.