When you retire you have many decisions to make, and one may be whether to take your retirement income as a lump sum or an annuity payment over your lifetime. If you have that choice, it’s important to consider your options carefully. For most people it could be a mistake to take a lump sum instead of an annuity, at least according to a 2016 Harris Poll study of retirees. (For more, see An Overview of Annuities.)
Lump Sum or an Annuity?
The study, Paycheck or Pot of Gold, was commissioned by MetLife, one of the world’s largest life insurance companies and a provider of financial services. The Harris Poll study revealed that 21% of retirement plan participants who took a lump sum depleted it in 5.5 years on average. Of those who still had money left, 35% said they were worried about running out during their lifetime. Although more than 85% of those who took a lump sum said they were glad they made that choice, many had serious financial concerns about budgeting or regrets about making large purchases early in retirement.
The Disadvantages of a Lump Sum
The biggest disadvantage of taking a lump sum at retirement has to do with risks. There are several, and each is worth considering.
- Overspending – Having access to a large wad of cash sounds attractive, but it also invites overspending. An annuity check once a month does not have nearly the disadvantage a lump sum does in that regard.
- Poor Investment Results – In order to generate income from a lump sum, you need to invest it wisely. That can be tricky, even for experienced money managers. You can pay someone to invest it, but that will cost you. Either way you risk running out of money.
- Loss of Subsidies – Taking a lump sum can cause you to lose money in other ways besides investment results. Companies that subsidize early retirement to get workers to leave are not required to factor in that incentive for…