As you begin retirement, you have to make some important financial decisions. One of them is whether to take your retirement payouts as a lump sum all at once or to use those funds to purchase an annuity that can provide a guaranteed lifetime stream of income.
While it may be tempting to take a lump sum at retirement from a pension or 401(k) plan, new research commissioned by MetLife and conducted by Harris Poll highlights the risks of this decision — and some challenges you may not have anticipated.
Early Overspending
When you first retire, a lump sum from your workplace retirement plan can seem like a significant amount of money – a proverbial “pot of gold.” It might seem like a great time to indulge in an expensive purchase after a lifetime of work and saving. You may also want to pay off credit card debt or help family members with their finances. But overspending in the early months and years of retirement can leave you with a significant shortfall later on. Our research shows that one in five recipients of a lump sum payment (21%) from their workplace retirement plan depleted those funds in an average of just 5 ½ years.
Investing Complexity
It’s not easy to manage a lump sum of money on your own. Knowing where to invest, how much you can afford to spend each month or year, and when and how to withdraw your money are just a few of the major decisions you will need to make again and again throughout your retirement.
Managing a lump sum is also a long-term responsibility. As you get older, managing this money is likely to become more difficult and time-consuming — at some point, you may no longer be able to do it on your own.
Underestimating How Long You’ll Live
No one knows how long they will live and many retirees underestimate their own longevity. If you are currently 65 years old, you have a 65% chance of living to age 85 and a 25% chance of reaching age 95. If you spend too much early on in retirement, you might not be planning far enough ahead.
Securing a Retirement “Paycheck”
Choosing a steady and guaranteed monthly or annual income stream in the form of an annuity can be a better choice for retirees. This will allow you to live off of a “paycheck” during retirement, in much the same way you do when you are working. According to the study, one-third of those who took a lump sum from their workplace retirement plan (32%) say they would feel more financially secure if they had purchased a guaranteed stream of income with an annuity instead — and half (52%) said their budgets would be more predictable.
But annuitization doesn’t have to be all or nothing — partial annuitization is an option. If given a chance to do it over again, 30% of retirement plan participants would use their retirement savings toward both guaranteed income and a lump sum.
To ensure that you are able to make your retirement savings last, ask your employer about your options for converting some or all of your retirement assets into guaranteed lifetime income with an annuity.
This article highlights findings from the MetLife Paycheck or Pot of Gold StudySM, released in April 2017.