Deciding Between a Lump Sum or an Annuity? Read This First

A recent study has discovered that retirees who opt to take a lump sum instead of a guaranteed monthly annuity from their defined benefit or contribution plan could be  making a big mistake. According to a recent article, the MetLife Paycheck or Pot of Gold study found that 21% of respondents who opted for a lump sum say they’ve already spent all of their money. Worse still, of that 21%, the average time it took to blow through that money was just five and a half years. Additionally, 35% of those who still have money left stated that they were scared of running out sooner, rather than later.

Most participants, whether taking the annuity option or the lump sum, stated that they were happy with their decision, but according to the data, the lump-sum recipients seem to have more financial worries than their counterparts.  The following are notable statistics found in the MetLife study.

  • 52% of the lump-sum crowd admit that their budgets would be more predictable if they had taken the annuity.
  • 91% of those who took the annuity said they feel financially secure, and 95% say the annuity payments make budgeting more predictable.
  • 41% of those who took a lump sum from a defined contribution plan claim they wouldn’t be worried about outliving their assets if they had chosen to annuitize, while 38% of those who took a lump sum from a defined benefit plan said the same.
  • 60% of annuity recipients think they worry less about outliving their money than their friends and neighbors who don’t have steady annuity income, while only 6% think they worry more.
  • 63% of those who took a lump sum reported major purchases/spending with the first year, with 31% reporting buyer’s remorse. 23% of those people who gave money away also had regrets.

There are two basic themes that many of the lump sum crowd share: fear and regret. Many are living their “Golden Years” scared of running out of money too quickly and remorseful of the money choices they’ve made. While annuity products aren’t for everyone, for many they provide stability and financial security in retirement. And that peace of mind is often worth more than many pre-retirees realize.

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