A growing proportion of retirees are depleting their DC plan lump-sum payments at faster rates than previously seen and may be regretting that decision to withdraw all their money, a new study finds.
On average, one in three retirees (34%) who took a lump sum from their DC plan depleted it within five years, according to MetLife’s 2022 Paycheck or Pot of Gold Study. In comparison, the firm’s inaugural study from 2017 found that one in five retirees (20%) who took a lump sum from a retirement plan depleted the balance in 5½ years, on average.
MetLife also found that a cloud of concern hangs over those individuals who still have assets remaining, with 41% of respondents expressing anxiety about their money running out. This is especially true for women, with nearly 6 in 10 (57%) concerned about depleting their lump sums, compared to about 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.
“There can be significant drawbacks for retirees when taking a lump sum,” notes Melissa Moore, Senior VP 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.”
For this latest study, the firm commissioned research of both pre-retirees (i.e., those within five years of retirement) and retirees. For pre-retirees, the study focused on the education and advice they are receiving from their employer, and assessed their views on the importance of guaranteed retirement income. For retirees, MetLife evaluated whether their experiences with taking a lump sum met with their expectations, as compared to those who opted for guaranteed retirement income by purchasing an annuity.
Current Thinking
When considering retirement, MetLife found that pre-retirees typically believe they will have about $450,000 (median) in their DC plan, but this varies widely. About 1 in 10 (11%) believe they will have less than $100,000 saved, while a similar proportion (14%) believe they will have saved more than $1 million. On average, pre-retirees expect this money to last 19 years in retirement—though one in six (16%) estimate that it won’t even last a decade.
Both pre-retirees and retirees fear they may not have properly planned for the sustainability of their retirement funds. About half of each cohort think they may have underestimated the amount they should have saved, underestimated their life expectancy and overestimated how long their retirement savings will last.
For those who have not yet retired, some apparently are rethinking when they should. About a third (30%) feel it’s likely they will delay their retirement from the age they had initially set so they can continue to save for retirement, maintain benefits and increase their Social Security monthly income.
Lump Sum vs. Partial Annuity
When it comes to retirement, about 9 in 10 retirees (89%) and pre-retirees (90%) feel it’s valuable (i.e., very important or essential) to have a guaranteed monthly income to pay their bills. Nearly the same number of pre-retirees (89%) say they are interested in an option that would allow them to have both a monthly retirement “paycheck” and access to a lump sum of their retirement savings. Among retirees, having the ability to take just a portion of their DC savings as guaranteed monthly payments is also a growing consideration (32%), up from 2% in 2017.
For those who plan to take their DC plan savings as a lump sum, more Boomers than Gen-Xers (70% for Boomers versus 58% for Gen-Xers) want to maintain control over their money, whereas more Gen-Xers than Boomers would choose the lump sum because they believe they could achieve better returns on their own (64% for Gen-Xers versus 47% for Boomers). “Wanting to maintain control over their money is a main reason for those who choose not to take an annuity, so it makes sense that for a vast majority of pre-retirees, a partial annuity/partial lump sum option is appealing,” the study notes.
However, if they had to choose one or the other, MetLife found that pre-retirees say they are more likely to opt for the annuity (82%) over a lump sum (18%). What’s more, the survey found that 53% of pre-retirees think their employer should be required to provide an annuity option. “Most retirees didn’t have the option of taking a partial lump sum/partial annuity,” observes Roberta Rafaloff, Vice President of Institutional Income Annuities at 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.”
Educational Efforts
Most retirees (80%) and pre-retirees (74%) report having received some form of information about what to do with the balance of their DC plan when they retire. For retirees, most feel the amount of information they had available to them at the point of retirement was just right (77%). Pre-retirees, however, are less emphatic, but still generally see the amount of information they’ve received as the “right amount” for what they need (69%), though more than one in five say it’s been too little (21%).
When choosing what to do with their DC balance, most retirees (81%) and pre-retirees (86%) opt to make this decision in consultation with someone else, most likely a financial planner, advisor or broker (43% retirees, 55% pre-retirees), or their spouse/partner (41% retirees, 39% pre-retirees). Among retirees, those who chose an annuity (54%) are more than twice as likely as those who chose a lump sum (25%) to have worked with a financial advisor during this decision-making process.
MetLife’s study also outlines several considerations for employers, workers and policymakers to help strengthen retirement income security. For employers, the firm suggests:
- conducting a strategic review of the plan’s ability to facilitate successful retirements;
- considering the addition of guaranteed lifetime income; and
- making retirement income education a priority.
The survey was conducted online within the U.S. by The Harris Poll on behalf of MetLife between Nov. 16 and Dec. 15, 2021, among 1,911 U.S. adults between the ages of 50-75 who were either retired (907) or within five years of retiring (1,004) and participate in their employer’s DC plan.
