According to a recent Harris Survey, people who take a lump sum from their employer-sponsored retirement plan are depleting those funds fast. In fact, 1 in 5 retirees has depleted it completely.
After lump sum withdrawal, according to Harris Poll:
62% had money leftover
21% had completely depleted their funds
17% didn’t know how much they had.
The average time for lump sum depletion was 5.5 years.
Running out of money, planned for retirement, in five or six years it typically signifies two things: They had a small amount of money, to begin with, or they had poor advice.
“Not having an advisor is a huge mistake,” Jim Donovon, an independent researcher of the financial industry said. “Many people think they can manage their retirement funds alone. And a small, tiny percentage can. But the research data shows over and over that without a professional advising people on their money the chance of them spending their money too fast or not having enough is much, much higher.”
Of course, some people deplete their lump sums because they have income from other sources. But the poll only showed this to be about 2% of cases. But still, depleting a lump sum is not advisable especially since the poll showed most did so with a car, RV, and other non-investment purchases.
Donovon added: “Unfortunately, people often see this lump sums much like lottery winnings. Something they lucked into and therefore are more easily to self-persuade to spend it on less wise things like cars, boats, jewelry. The lump sum changes the psychology and has been very problematic. In many ways, I wish the industry would split lump sum payments into small installments. I think that would help people not spend it so fast. However, it is their money, and they should have the freedom to do what they wish with it. But a sound financial advisor could guide them from making this all too often mistake.”
One way to guard against depleting funds is to rollover your valuable retirement funds to an asset class that guarantees safety and security. Annuities. Annuities can provide income which allows people to see just how long their retirement funds will last.
In Congress, the Lifetime Income Disclosure Act introduced with bipartisan support this month would amend the Employee Retirement Income Security Act of 1974 to require lifetime income disclosure. Donovon stated that the passage of this bill would likely eliminate 50% of those lump sum depletions citing that simple education helps people make better decisions.
The advisor is essential.
Considering income that can never be outlived offers a long-term solution, a solution that can help relieve stress. Making decisions that affect long term financial support requires careful planning. It is in most people’ best interest to work on a retirement plan with an advisor. Many pitfalls can appear over time, inflation, health and lifestyle.
Preparing for the unknown can be hard, but those who make sure their primary retirement funds are guaranteed will be much further ahead.
“It’s no different than a person with a health problem who diagnoses themselves with internet research,” Donovon said. “90% of the time they are wrong when they finally visit the doctor. A sound financial advisor is like a physician for your finances.”