Retirees Depleting Retirement Plan Lump Sums Faster Than Five Years Ago

When approaching retirement, employees are faced with a decision that can have lifelong implications: take a lump sum payment or a guaranteed monthly annuity from their employer-sponsored defined contribution (DC) plan. According to MetLife’s 2022 Paycheck or Pot of Gold Study, a growing proportion of retirees are depleting their lump sums at faster rates than previously seen.

“Most retirees didn’t have the option of taking a partial lump sum/partial annuity”

Today, one in three retirees (34%) who took a lump sum from their DC plan, depleted the lump sum in 5 years, on average. In 2017, the inaugural Paycheck or Pot of Gold Study found that one in five retirees (20%) who took a lump sum from a retirement plan depleted their lump sum, on average, in 5½ years.

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“There can be significant drawbacks for retirees when taking a lump sum,” said Melissa Moore, senior vice president and head of Annuities at MetLife. “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.”

A cloud of concern also hangs over those individuals who still have assets remaining. The Study found 41% express anxiety about their money running out. This is especially true for women, with over half (57%) concerned about depleting their lump sums, compared to a third (34%) of men. More women have also already depleted their lump sums in retirement, with 43% of women having done so, compared to 29% of men.

Spending Habits

For those who selected a lump sum at retirement, more than three-quarters (79%) made at least one major purchase, including luxury items such as vehicles, vacations, and new or second homes, within the first year of withdrawing money. This is a significant increase from 2017, when 64% made such a purchase. Amongall lump sum recipients, just under half (46%) express at least some regret about withdrawing money from their DC plan.

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In comparison, nearly all annuity-only retirees (97%) use their DC plan money for some type of ongoing expense, such as day-to-day living expenses or housing expenses, and 94% agree that receiving annuity payments makes it easier for them to pay for basic necessities. With that, 95% say that receiving monthly annuity payments makes them feel financially secure. In fact, virtually all annuity-only recipients are happy (96%) that they chose to receive a retirement paycheck from their DC plan.

Pre-retirees Prefer a Guaranteed Retirement “Paycheck”

“Most retirees didn’t have the option of taking a partial lump sum/partial annuity,” added Roberta Rafaloff, vice president, Institutional Income Annuities, MetLife. “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.”

That’s good news since nine in 10 pre-retirees (90%) feel it’s valuable (i.e., very important or absolutely essential) for someone to have a guaranteed monthly income in retirement (i.e., a retirement “paycheck”) to pay their bills. Nine in 10 pre-retirees (89%) also say they are interested in an option that would allow them to have both a monthly retirement “paycheck” 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 are far more likely to opt for the annuity (monthly retirement “paycheck”) (82%) over a lump sum that would give them all of their retirement savings at one time but could potentially run out (18%).

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