Lump-Sum Recipients Focus on Finances, Not Consumption

There has been a profound change in how participants are using lump-sum distributions that they might receive upon leaving an employer. In the past, many would look at these sometimes large distributions as some sort of windfall. A report from the Employee Benefit Research Institute (EBRI) suggests that this attitude has changed, and for the better. While some still use these distributions for consumption purposes, large numbers are rolling over their distributions to other tax-qualified retirement plans or IRAs. Another large segment is using the distributions toward paying down debt, establishing a business, or applying it to a mortgage or other loan. In 1993, more distributions went toward consumer purchases than to rollovers to qualified plans or IRAs. In 2012, rollovers are way up and consumer spending is way down when it comes to lump sums. 

• rollovers to qualified plans or IRAs - 19.3% in 1993 vs. 45.2% in 2012
• purchase of home, start of business, debt, mortgage - 17.6% in 1993 vs. 28.2% in 2012
• consumer spending, dental and medical expenses, general everyday spending - 22.7% in1993 vs. 7.5% in 2012

What I think this suggests is that while saving for retirement is a very important goal, it is still part of a more comprehensive financial picture. Understanding this and creating solutions to help individuals who are trying to navigate their own situations will be key to keeping them on the right path toward a more secure retirement. Merely telling a participant to save more for retirement without addressing their other financial circumstances will most likely fall short. While we have seen average account balances continue to rise to record levels and rebound from the economic decline of 2008-2009, the precipitous drop in housing prices at that time has made many individuals and families continue to struggle to bounce back. Nonetheless, the EBRI report is encouraging because it suggests that individuals are doing their best to act responsibly in managing their finances to the best of their respective abilities.
more
more